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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 MARCH 31, 2003
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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK,
$.01 PAR VALUE PER SHARE
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Number of shares outstanding of the issuer's classes of common stock as
of May 8, 2003:
Class Number of Shares Outstanding
----- ----------------------------
common stock, par value $0.01 per share 12,224,140
SS&C TECHNOLOGIES, INC.
INDEX
Page Number
-----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at
March 31, 2003 and December 31, 2002 2
Consolidated Statements of Operations for the three months ended
March 31, 2003 and 2002 3
Consolidated Statements of Cash Flows for the three months ended
March 31, 2003 and 2002 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Item 4. Controls and Procedures 14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURE 15
CERTIFICATIONS 16
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. The Company does not
undertake an obligation to update its forward-looking statements to reflect
future events or circumstances.
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SS&C TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
March 31, December 31,
2003 2002
-------- ------------
ASSETS
Current assets
Cash and cash equivalents $ 21,561 $ 18,336
Investments in marketable securities 26,883 23,383
Accounts receivable, net of allowance for doubtful accounts 12,324 10,983
Prepaid expenses and other current assets 810 1,065
Deferred income taxes 1,064 1,142
-------- --------
Total current assets 62,642 54,909
-------- --------
Property and equipment
Leasehold improvements 3,336 3,301
Equipment, furniture, and fixtures 16,202 16,144
-------- --------
19,538 19,445
Less accumulated depreciation (14,254) (13,700)
-------- --------
Net property and equipment 5,284 5,745
-------- --------
Deferred income taxes 6,731 6,762
Goodwill 2,432 2,355
Intangible and other assets, net of accumulated amortization 5,252 5,709
-------- --------
Total assets $ 82,341 $ 75,480
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 561 $ 844
Income taxes payable 1,915 646
Accrued employee compensation and benefits 1,314 3,462
Other accrued expenses 1,919 2,044
Deferred maintenance and other revenue 18,474 11,214
-------- --------
Total current liabilities 24,183 18,210
-------- --------
Stockholders' equity
Common stock 170 170
Additional paid-in capital 95,709 95,324
Accumulated other comprehensive loss (682) (735)
Retained earnings (deficit) 562 (1,767)
-------- --------
95,759 92,992
Less: Treasury shares 37,601 35,722
-------- --------
Total stockholders' equity 58,158 57,270
-------- --------
Total liabilities and stockholders' equity $ 82,341 $ 75,480
======== ========
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
March 31, March 31,
2003 2002
--------- ----------
Revenues:
Software licenses $ 3,382 $ 3,205
Maintenance 7,618 6,815
Professional services 1,657 1,940
Outsourcing 3,081 3,255
------- -------
Total revenues 15,738 15,215
------- -------
Cost of revenues:
Software licenses 519 323
Maintenance 1,488 1,430
Professional services 1,154 1,392
Outsourcing 1,982 2,152
------- -------
Total cost of revenues 5,143 5,297
------- -------
Gross profit 10,595 9,918
------- -------
Operating expenses:
Selling and marketing 2,105 2,660
Research and development 3,003 2,861
General and administrative 1,922 1,992
Write-off of purchased in-process research and development -- 1,744
------- -------
Total operating expenses 7,030 9,257
------- -------
Operating income 3,565 661
------- -------
Interest income, net 249 442
Other income, net 5 455
------- -------
Income before income taxes 3,819 1,558
Provision for income taxes 1,490 623
-------- --------
Net income $ 2,329 $ 935
======= =======
Basic earnings per share $ 0.18 $ 0.07
======= =======
Basic weighted average number of common shares outstanding 12,616 13,905
======= =======
Diluted earnings per share $ 0.18 $ 0.06
======= =======
Diluted weighted average number of common and common equivalent
shares outstanding 13,235 14,436
======= =======
See accompanying notes to Consolidated Financial Statements.
3
SS&C TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three months ended
March 31, March 31,
2003 2002
-------- --------
Cash flow from operating activities:
Net income $ 2,329 $ 935
-------- --------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 934 1,091
Net realized gain on marketable securities (2) (486)
Loss on sale of property and equipment 1 1
Deferred income taxes 108 172
Purchased in-process research and development -- 1,744
Provision for doubtful accounts 348 146
Changes in operating assets and liabilities, excluding
effects from acquisitions:
Accounts receivable (1,683) (1,704)
Prepaid expenses and other assets 265 268
Accounts payable (283) (169)
Accrued expenses (2,280) (1,733)
Taxes payable 1,265 (347)
Deferred maintenance and other revenues 7,251 5,742
-------- --------
Total adjustments 5,924 4,725
-------- --------
Net cash provided by operating activities 8,253 5,660
-------- --------
Cash flow from investing activities:
Additions to property and equipment (105) (132)
Cash paid for business acquisitions, net of cash acquired -- (3,943)
Purchases of marketable securities (8,952) (5,526)
Sales of marketable securities 5,421 3,713
-------- --------
Net cash used in investing activities (3,636) (5,888)
-------- --------
Cash flow from financing activities:
Repayment of debt and acquired debt -- (146)
Exercise of options 385 430
Purchase of common stock for treasury (1,879) (12,139)
-------- --------
Net cash used in financing activities (1,494) (11,855)
-------- --------
Effect of exchange rate changes on cash 102 (45)
-------- --------
Net increase (decrease) in cash and cash equivalents 3,225 (12,128)
Cash and cash equivalents, beginning of period 18,336 28,425
-------- --------
Cash and cash equivalents, end of period $ 21,561 $ 16,297
======== ========
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 elsewhere in the notes to the consolidated
financial statements) necessary to present fairly its financial position as of
March 31, 2003 and the results of its operations for the three months ended
March 31, 2003 and 2002. 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, 2002 which were included in the Company's
Annual Report on Form 10-K filed with the Securities and Exchange Commission.
The December 31, 2002 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 ended March 31, 2003 are not necessarily
indicative of the expected results for the full year.
2. Recent Accounting Pronouncements
In December 2002, the Financial Accounting Standards Board issued SFAS No. 148,
"Accounting for Stock-Based Compensation Costs - Transition and Disclosure".
This statement amends SFAS No. 123, "Accounting for Stock-Based Compensation",
and provides alternative methods of transition for an entity that voluntarily
changes to the fair value-based method of accounting for stock-based
compensation. The Company accounts for stock-based compensation in accordance
with APB Opinion No. 25, "Accounting for Stock Issued to Employees" and has
adopted the disclosure-only alternative of SFAS No. 123. In December 2002, the
Company adopted the disclosure provisions of SFAS No. 148. Accordingly, no
compensation expense has been recognized for the stock option plans and employee
stock purchase plan. Had compensation expense for the Company's stock option
plans and employee stock purchase plan been recognized based on the fair value
provisions of SFAS No. 123, the Company's net income and earnings per share
would have been adjusted to the pro forma amounts indicated in the table below
for the three months ended (in thousands except per share amounts):
March 31, March 31,
2003 2002
--------- ---------
Net income, as reported $ 2,329 $ 935
Deduct: total stock-based compensation determined
under fair value based method for all awards 765 1,236
--------- ---------
Net income (loss), pro forma 1,564 (301)
========= =========
Reported net income per share
Basic 0.18 0.07
Diluted 0.18 0.06
Pro forma net income (loss) per share
Basic 0.12 (0.02)
Diluted 0.12 (0.02)
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts.
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 consist of stock options
using the treasury stock method. Common equivalent
5
shares are excluded from the computation of diluted earnings per share if the
effect of including such common equivalent shares is antidilutive. Options to
purchase 0.7 million and 1.4 million shares were outstanding at March 31, 2003
and 2002, respectively, but were excluded from the computation of diluted
earnings per share because the effect of including the 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):
March 31, March 31,
2003 2002
--------- ---------
Weighted average common shares outstanding - used in
calculation of basic earnings per share 12,616 13,905
Weighted average common stock equivalents -- options 619 531
--------- ---------
Weighted average common and common equivalent
shares outstanding - used in calculation of
diluted earnings per share 13,235 14,436
========= ========
4. Comprehensive Income
SFAS 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. Total comprehensive income
consists of net income and other accumulated comprehensive income disclosed in
the equity section of the balance sheet.
The following table sets forth the components of comprehensive income (in
thousands):
Three Months Ended
-------------------------
March 31, March 31,
2003 2002
------- -----
Net income $ 2,329 $ 935
Foreign currency translation gain (loss) 86 (51)
Unrealized losses on marketable securities (33) (820)
------- -----
Total comprehensive income $ 2,382 $ 64
======= =====
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, pursuant to which the Company repurchased 442,000
shares for $4.8 million between that date and March 31, 2003. The Company
initiated the repurchase program on May 23, 2000, pursuant to which it
repurchased 1.2 million shares for $6.4 million between that date and May 23,
2001. The Company continued the repurchase program on May 24, 2001, pursuant to
which it repurchased 2.9 million shares for $26.4 million between that date and
May 21, 2002. As of March 31, 2003, the Company had repurchased a total of 4.5
million shares for approximately $37.6 million under its repurchase programs.
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 $3.9 million in cash and the assumption of
certain liabilities by the Company, and a potential earn-out payment by the
Company of up to $1.17 million in cash if certain 2002 revenue targets were
achieved. The revenue targets were not attained in 2002, and thus no earn-out
payment was made. A summary of the allocation of the purchase price appears
below.
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
6
tangible and intangible assets, liabilities, and in-process research and
development ("IPR&D") based on their fair market 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 is 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 Lightning project was
completed in 2002.
On November 15, 2002, the Company acquired the assets and business of DBC, a
business within The Thomson Corporation, and assumed certain liabilities. DBC is
a leading provider of financial software for fixed income analysis in municipal
finance in the United States. DBC products are widely used for structuring
general obligation and revenue bond issues, including asset-backed housing and
student loan securitizations. The consideration was $4.6 million.
The acquisition was accounted for as a purchase. The net assets and results of
operations of DBC have been included in the consolidated financial statements of
the Company from November 1, 2002. The purchase price was first allocated to
tangible assets and liabilities based on their fair value on the date of the
acquisition. The fair value of acquired completed technology of $2.9 million was
determined based on the future cash flows method. The acquired completed
technology is amortized on a straight-line basis over five years, the estimated
life of the product. The remainder of the purchase price was allocated to
goodwill.
The following summarizes the allocation of the purchase price for the Real-Time
and DBC acquisitions (in thousands):
REAL-TIME DBC
---------- -------
Assets acquired, net of cash received $ 664 $ 819
Purchased technology 1,743 2,912
In-process research and development 1,744 --
Goodwill -- 2,368
Liabilities assumed (221) (1,534)
------- -------
Consideration paid $ 3,930 $ 4,565
======= =======
7. Reclassifications
Certain amounts in prior year consolidated financial statements have been
reclassified to be comparable with the current year presentation. These
classifications have had no effect on 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. In the opinion of management, the
Company is not a party to any litigation that it believes could have a material
effect on the Company or its business.
In 2001, the Internal Revenue Service ("IRS") notified the Company of purported
federal income tax deficiencies for the years 1997 through 1999. At issue was
the Company's deduction of an aggregate of $6.8 million of payments made by the
Company pursuant to the settlement, on May 7, 1999, of a consolidated securities
class action lawsuit. In 2002, the Company reached a settlement with the IRS
that allowed $5.5 million of the Company's original $6.8 million deduction. The
impact of this settlement has been included in the Company's 2002 income tax
provision. Although a substantial number of issues for the years being audited
have been resolved, the Company has also received a notice of proposed tax
deficiencies for the years 1997
7
through 1999 for other matters, for which the Company has filed an appeal.
Management believes the ultimate outcome will not have a material adverse impact
on the Company's financial position or results of operation.
9. International Sales and Geography Information
The Company manages its business primarily on a geographic basis. The Company
attributes net sales to an individual country based upon location of the
customer. The Company's reportable segments consist of the United States,
Americas excluding United States, Europe and Other. The European segment
includes European countries as well as the Middle East and Africa. Other
operating segments include Asia Pacific and Japan.
Revenues by geography were (in thousands):
Three Months Ended
--------------------------
March 31, March 31,
2003 2002
------- -------
United States $13,302 $12,626
Americas excluding United States 809 1,114
Europe 1,080 1,023
Other 547 452
------- -------
$15,738 $15,215
======= =======
10. Subsequent events
On April 28, 2003, the Company announced that it has agreed to repurchase a
block of 500,000 shares of its common stock at a price of $13.10 per share, for
a total purchase price of $6,550,000. In addition, the Company's Board of
Directors increased the aggregate dollar value of common stock authorized for
repurchase under its May 2002 stock repurchase program from $10 million to $15
million.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
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, management's 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
critical accounting policies are described in its annual filing on Form 10-K and
include
- - Revenue Recognition
- - Allowance for Doubtful Accounts
- - Long-Lived Assets, Intangible Assets and Goodwill
- - Acquisition Accounting
- - Income Taxes
- - Marketable Securities
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 March 31, 2003 were $15.7 million, representing an increase of 3%
from the $15.2 million in the comparable period in 2002. The increase of $0.5
million was primarily due to the acquisition of DBC offset by decreases in
professional services and outsourcing revenues.
Software Licenses. Software license revenues for the three months ended March
31, 2003 were $3.4 million, representing an increase of 6% from $3.2 million in
the comparable period in 2002. Increased revenues due to the acquisition of DBC
and higher sales of AdvisorWare, Antares, and LMS were offset by lower sales of
CAMRA.
Maintenance. Maintenance revenues for the three months ended March 31, 2003 were
$7.6 million, representing an increase of 12% from $6.8 million in the
comparable period in 2002. Maintenance revenue growth was primarily due to the
acquisition of DBC.
Professional Services. Professional services revenues for the three months ended
March 31, 2003 were $1.7 million, representing a decrease of 15% from $1.9
million in the comparable period in 2002. The decrease was primarily due to a
decrease in demand for the Company's implementation, conversion, and training
services.
Outsourcing. Outsourcing revenues for the three months ended March 31, 2003 were
$3.1 million, representing a decrease of 5% from $3.3 million in the comparable
period in 2002. The decrease was due to a decline in PortPro revenue partially
offset by an increase in AdvisorWare revenue and the addition of outsourcing
services for Lightning, which was released in the second half of 2002.
Cost of Revenues
Total cost of revenues decreased by 3% from $5.3 million in the three months
ended March 31, 2002 to $5.1 million in the three months ended March 31, 2003.
The gross margin increased to 67% in the three months ended March 31, 2003 from
65% for the comparable period in 2002. The overall increase in gross margin was
due to improvements in professional services and outsourcing margins, offset by
a decrease in the margin for software licenses.
9
Cost of Software Licenses. Cost of software license revenues consists primarily
of amortization expense of completed technology, royalties, third-party
software, and the costs of product media, packaging and documentation. The cost
of software licenses increased 61% from $323,000 in the three months ended March
31, 2002 to $519,000 in the three months ended March 31, 2003. The increase in
costs was mainly due to an increase in amortization of completed technology
associated with the DBC acquisition. Cost of software license revenues as a
percentage of such revenues increased from 10% in the three months ended March
31, 2002 to 15% in the comparable period in 2003.
Cost of Maintenance. Cost of maintenance revenues consists primarily of
technical customer support and engineering costs associated with product and
regulatory updates. The cost of maintenance revenues increased 4% from $1.4
million in the three months ended March 31, 2002 to $1.5 million in the three
months ended March 31, 2003. The increase was due to the DBC acquisition
partially offset by decreased costs as a result of improved efficiencies and
cost reductions initiated in 2002.
Cost of Professional Services. Cost of professional services revenues consists
primarily of costs related to personnel utilized to provide implementation,
conversion and training services to the Company's software licensees, as well as
system integration, custom programming, and actuarial consulting services. The
cost of professional services revenues decreased 17% from $1.4 million in the
three months ended March 31, 2002 to $1.2 million in the three months ended
March 31, 2003. The cost of professional services revenues as a percentage of
such revenues decreased from 72% in the three months ended March 31, 2002 to 70%
in the three months ended March 31, 2003. The Company reduced its professional
consulting organization and associated costs due to the decrease in demand for
the Company's implementation and consulting services.
Cost of Outsourcing. Cost of outsourcing revenues consists primarily of costs
related to personnel utilized in servicing the Company's outsourcing clients.
The cost of outsourcing revenues decreased 8% from $2.2 million in the three
months ended March 31, 2002 to $2.0 million in the three months ended March 31,
2003, representing 66% and 64% of outsourcing revenues in those periods,
respectively. The decrease in costs of outsourcing in dollars, and as a
percentage of outsourcing revenues, was due primarily to improved operating
efficiencies and the resulting decrease in costs of supporting the Company's
outsourcing business.
Operating Expenses
Total operating expenses decreased 24% from $9.3 million in the three months
ended March 31, 2002 to $7.0 million in the three months ended March 31, 2003,
representing 61% and 45% of total revenues in those periods, respectively.
Included in the 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. The decrease in operating expenses was primarily due to
the cost reduction steps the Company has undertaken to align its personnel and
operating expenses with revenues and a decrease in depreciation expense
partially offset by operating expenses of the DBC business and an increase in
bad debt expense. DBC was acquired in the fourth quarter of 2002.
Selling and Marketing. Selling and marketing expenses consist primarily of the
personnel costs 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, and marketing and promotional materials. These expenses decreased 21%
from $2.7 million in the three months ended March 31, 2002 to $2.1 million in
the three months ended March 31, 2003, representing 17% and 13% of total
revenues in those periods, respectively. The decrease was 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 partially offset
by DBC-related costs.
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 5%
from $2.9 million in the three months ended March 31, 2002 to $3.0 million in
the three months ended March 31, 2003, representing 19% of total revenues in
each those periods. The increase was mainly due to DBC-related costs partially
offset by cost reductions in personnel and other related support costs.
General and Administrative. General and administrative expenses consist
primarily of personnel costs related to management, accounting and finance,
information management, human resources and administration and associated
overhead costs, as well as fees for professional services. General and
administrative expenses decreased 4% from $2.0 million in the three months ended
March 31, 2002 to $1.9 million in the three months ended March 31, 2003,
representing 13% and 12% of total revenues in those periods, respectively. The
decrease was mainly due to lower personnel-related costs partially offset by an
increase in bad debt expense.
10
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
market values on the date of 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, Net. Interest and other income, net consists
primarily of interest income and other non-operational income and expenses.
Interest income, net was $249,000 for the three months ended March 31, 2003
compared to $442,000 in the same period of 2002. The decrease in interest income
was the result of lower market interest rates on investments. Included in other
income, net for the period ended March 31, 2002 was a non-operational gain of
$486,000 resulting from the sale of equity investments.
Provision for Income Taxes. The Company had an effective tax rate of 39% and 40%
in the three months ended March 31, 2003 and 2002, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and marketable securities at March 31, 2003
were $48.4 million, which is an increase of $6.7 million from $41.7 million at
December 31, 2002. The increase was primarily due to the collection of
maintenance fees billed during the quarter. A disproportionate larger amount of
annual maintenance fees are typically billed during the first quarter compared
to other quarters during the year.
Net cash provided by operating activities was $8.3 million for the three months
ended March 31, 2003. Cash provided by operating activities was primarily due to
earnings of $2.3 million adjusted for non-cash items of $1.4 million, an
increase of $1.3 million in taxes payable and an increase of $7.3 million in
deferred maintenance and other revenues. These items were partially offset by an
increase of $1.7 million in accounts receivable and a decrease of $2.3 million
in accrued expenses.
Investing activities used net cash of $3.6 million for the three months ended
March 31, 2003. Cash used in investing activities was primarily due to the $3.5
million net purchases of marketable securities.
Financing activities used net cash of $1.5 million for the three months ended
March 31, 2003. Cash used in financing activities was primarily due to the
Company's activities under its stock repurchase program. The Company repurchased
172,500 shares of common stock for treasury in the three-month period ended
March 31, 2003 for a total cost of $1.9 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. As of March 31, 2003
and 2002, the Company does not have any relationships with unconsolidated
entities or financial partnerships, which would have been established for the
purpose of facilitating off-balance sheet arrangements.
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
11
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.
INTEGRATION OF OPERATIONS. The Company's success is dependent in part on its
ability to complete the integration of the operations of its recently acquired
businesses, including DBC, Real-Time and Digital Visions, in an efficient and
effective manner. Successful integration in the 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
integration will be accomplished smoothly or successfully. The difficulties of
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.
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 total 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. The Company believes the principal competitive
factors in its industry include consistent product performance, broad
functionality, ease of use, scalability, integration capabilities, product and
company reputation, client service and support, and price. Although the Company
believes it currently competes effectively with respect to these factors, there
can be no assurance that the Company will be able to maintain its competitive
position against current and potential competitors.
The Company believes none of its competitors currently competes against it in
all of its target industry segments, although there can be no assurance that one
or more may not compete against the Company in the future in additional industry
segments. Many of the Company's current and potential competitors have
significantly greater financial, technical, and marketing resources, generate
higher revenues, and have greater name recognition. There can be no assurance
that the Company's current or potential competitors will not develop products
comparable or superior to those developed by the Company, or adapt more quickly
than the Company to new technologies, evolving industry trends, or changing
client requirements. It is also possible that alliances among competitors may
emerge and rapidly acquire significant market share. Increased competition may
result in price reductions, reduced gross margins, and loss of market share, any
of which would materially adversely affect the Company's business, financial
condition, and results of operations.
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.
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
12
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 financial 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.
13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has no derivative financial instruments. The Company generally
places its marketable security investments in high credit quality instruments,
primarily U.S. Government and Federal Agency obligations, tax-exempt municipal
obligations and corporate obligations. The Company does not expect any material
loss from its marketable security investments and therefore believes that its
potential interest rate exposure is not material.
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 currency exchange rate fluctuations from the
time customers are invoiced in local currency until collection occurs. Through
March 31, 2003, foreign currency exchange rate 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.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Based on their evaluation of
the Company's disclosure controls and procedures (as defined in Rules 13a-14(c)
and 15d-14(c) under the Securities Exchange Act of 1934) as of a date within 90
days of the filing date of this Report, the Company's chief executive officer
and chief financial officer have concluded that the Company's disclosure
controls and procedures are designed to ensure that information required to be
disclosed by the Company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms and are operating in an effective
manner.
CHANGES IN INTERNAL CONTROLS. There were no significant changes in the Company's
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation. There were no significant
deficiencies or material weaknesses in the Company's internal controls, and
therefore there were no corrective actions taken.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON 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 during the quarter ended March
31, 2003.
14
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: May 13, 2003 By:/s/ Patrick J. Pedonti
Patrick J. Pedonti
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
15
CERTIFICATIONS
I, William C. Stone, certify that:
1. I have reviewed this quarterly report on Form 10-Q of SS&C
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a. all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 13, 2003 By:/s/ William C. Stone
William C. Stone
Chief Executive Officer
16
CERTIFICATIONS
I, Patrick J. Pedonti, certify that:
1. I have reviewed this quarterly report on Form 10-Q of SS&C
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a. all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 13, 2003 By:/s/ Patrick J. Pedonti
Patrick J. Pedonti
Chief Financial Officer
17
EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
99.1 Certification of Chief Executive
Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial
Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
18