Back to GetFilings.com
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, 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
August 8, 2003:
Class Number of Shares Outstanding
----- ----------------------------
Common Stock, par value $0.01 per share 12,323,558
SS&C TECHNOLOGIES, INC.
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at
June 30, 2003 and December 31, 2002 2
Consolidated Statements of Operations for the three
months and six months ended June 30, 2003 and 2002 3
Consolidated Statements of Cash Flows for the six
months ended June 30, 2003 and 2002 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
Item 4. Controls and Procedures 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. 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)
June 30, December 31,
2003 2002
-------- -----------
ASSETS
Current assets
Cash and cash equivalents $ 19,148 $ 18,336
Investments in marketable securities 27,047 23,383
Accounts receivable, net of allowance for doubtful accounts 10,735 10,983
Prepaid expenses and other current assets 747 1,065
Deferred income taxes 987 1,142
-------- --------
Total current assets 58,664 54,909
-------- --------
Property and equipment
Leasehold improvements 3,307 3,301
Equipment, furniture, and fixtures 16,434 16,144
-------- --------
19,741 19,445
Less accumulated depreciation (14,754) (13,700)
-------- --------
Net property and equipment 4,987 5,745
-------- --------
Deferred income taxes 6,681 6,762
Goodwill 2,432 2,355
Intangible and other assets, net of accumulated amortization 4,908 5,709
-------- --------
Total assets $ 77,672 $ 75,480
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 925 $ 844
Income taxes payable 938 646
Accrued employee compensation and benefits 1,871 3,462
Other accrued expenses 1,905 2,044
Deferred maintenance and other revenue 14,733 11,214
-------- --------
Total current liabilities 20,372 18,210
-------- --------
Stockholders' equity
Common stock 174 170
Additional paid-in capital 98,656 95,324
Accumulated other comprehensive income (loss) 316 (735)
Retained earnings (deficit) 3,297 (1,767)
-------- --------
102,443 92,992
Less: treasury shares (45,143) (35,722)
-------- --------
Total stockholders' equity 57,300 57,270
-------- --------
Total liabilities and stockholders' equity $ 77,672 $ 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 Six Months Ended
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
------- ------- ------- -------
Revenues:
Software licenses $ 3,723 $ 4,172 $ 7,105 $ 7,377
Maintenance 7,715 6,812 15,333 13,627
Professional services 1,262 1,575 2,919 3,515
Outsourcing 3,206 3,313 6,287 6,568
------- ------- ------- -------
Total revenues 15,906 15,872 31,644 31,087
------- ------- ------- -------
Cost of revenues:
Software licenses 423 305 942 628
Maintenance 1,504 1,394 2,992 2,824
Professional services 1,117 1,340 2,271 2,732
Outsourcing 2,046 2,193 4,028 4,345
------- ------- ------- -------
Total cost of revenues 5,090 5,232 10,233 10,529
------- ------- ------- -------
Gross profit 10,816 10,640 21,411 20,558
------- ------- ------- -------
Operating expenses:
Selling and marketing 2,036 2,475 4,141 5,135
Research and development 2,876 3,104 5,879 5,965
General and administrative 1,731 1,945 3,653 3,937
Write-off of purchased in-process research and development - - - 1,744
------- ------- ------- -------
Total operating expenses 6,643 7,524 13,673 16,781
------- ------- ------- -------
Operating income 4,173 3,116 7,738 3,777
Interest income 235 399 484 841
Other income (expense), net 74 (854) 79 (399)
------- ------- ------- -------
Income before income taxes 4,482 2,661 8,301 4,219
Provision for income taxes 1,748 1,064 3,238 1,687
------- ------- ------- -------
Net income $ 2,734 $ 1,597 $ 5,063 $ 2,532
======= ======= ======= =======
Basic earnings per share $ 0.22 $ 0.13 $ 0.41 $ 0.19
======= ======= ======= =======
Basic weighted average number of common shares outstanding 12,340 12,654 12,478 13,279
======= ======= ======= =======
Diluted earnings per share $ 0.21 $ 0.12 $ 0.38 $ 0.18
======= ======= ======= =======
Diluted weighted average number of common and common
equivalent shares outstanding 13,153 13,507 13,198 13,979
======= ======= ======= =======
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,
2003 2002
-------- --------
Cash flow from operating activities:
Net income $ 5,063 $ 2,532
-------- --------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,870 2,147
Net realized losses (gains) on marketable securities (88) 368
Loss on sale or disposal of property and equipment 12 1
Deferred income taxes 236 373
Purchased in-process research and development - 1,744
Provision for doubtful accounts 477 245
Changes in operating assets and liabilities:
Accounts receivable (182) (1,092)
Prepaid expenses and other assets 314 237
Accounts payable 80 (243)
Accrued expenses (1,756) (1,013)
Taxes payable 283 (419)
Deferred maintenance and other revenues 3,419 4,178
-------- --------
Total adjustments 4,665 6,526
-------- --------
Net cash provided by operating activities 9,728 9,058
-------- --------
Cash flow from investing activities:
Additions to property and equipment (375) (329)
Proceeds from sale of property and equipment - 3
Cash paid for business acquisitions, net - (3,943)
Purchases of marketable securities (14,992) (5,526)
Sales of marketable securities 12,245 9,109
-------- --------
Net cash used in investing activities (3,122) (686)
-------- --------
Cash flow from financing activities:
Repayment of debt - (146)
Issuance of common stock 134 120
Exercise of options 3,202 1,166
Purchase of common stock for treasury (9,421) (24,963)
-------- --------
Net cash used in financing activities (6,085) (23,823)
-------- --------
Effect of exchange rate changes on cash 291 275
-------- --------
Net increase (decrease) in cash and cash equivalents 812 (15,176)
Cash and cash equivalents, beginning of period 18,336 28,425
-------- --------
Cash and cash equivalents, end of period $ 19,148 $ 13,249
======== ========
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 management, 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 June 30, 2003 and the results of its operations for the three
months and six months ended June 30, 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 SS&C Technologies, Inc.'s (the "Company") 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 and six months ended June 30, 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
(in thousands except per share amounts):
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
--------- --------- --------- ---------
Net income, as reported $ 2,734 $ 1,597 $ 5,063 $ 2,532
Deduct: total stock-compensation
determined under fair value-based method
for all awards, net of related tax effects 211 565 762 1,432
--------- --------- --------- ---------
Net income, pro forma $ 2,523 $ 1,032 $ 4,301 $ 1,100
========= ========= ========= =========
Reported net income per share
Basic $ 0.22 $ 0.13 $ 0.41 $ 0.19
Diluted $ 0.21 $ 0.12 $ 0.38 $ 0.18
Pro forma net income per share
Basic $ 0.20 $ 0.08 $ 0.34 $ 0.08
Diluted $ 0.19 $ 0.08 $ 0.33 $ 0.08
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts.
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 consist of stock options
using the treasury stock method. Common equivalent 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 169,000 and 916,000
shares were outstanding at June 30, 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):
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
-------- -------- -------- --------
Basic weighted average shares outstanding- used in
calculation of basic earnings per share 12,340 12,654 12,478 13,279
Weighted average common stock equivalents--options 813 853 720 700
------ ------ ------ ------
Diluted weighted average shares outstanding- used in
calculation of diluted earnings per share 13,153 13,507 13,198 13,979
====== ====== ====== ======
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 Six Months Ended
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
-------- -------- -------- --------
Net income $ 2,734 $ 1,597 $ 5,063 $ 2,532
Foreign currency translation gains 137 301 223 250
Unrealized gains (losses) on
marketable securities 862 147 829 (673)
------- ------- ------- -------
Total comprehensive income $ 3,733 $ 2,045 $ 6,115 $ 2,109
======= ======= ======= =======
5. Stock Repurchase Program
On May 22, 2003, the Company's Board of Directors authorized the continued
repurchase of shares of the Company's common stock up to an additional
expenditure of $30 million. Under the repurchase programs the Company has
purchased a total of 742,000 shares for approximately $9.4 million in the six
months ended June 30, 2003. As of June 30, 2003, the Company had repurchased 5.1
million shares for approximately $45.1 million since the repurchase program was
initiated on May 23, 2000.
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
6
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 of operations of Real-Time have been included in the consolidated
financial statements of the Company from January 1, 2002. The activity during
the intervening period was not material. The purchase price was allocated to
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 being 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 three-month
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 activity during the intervening period
was not material. 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 being
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
--------- -------
Tangible 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. 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 other 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
7
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 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.
8. 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 the location of the
customer. The Company's geographic 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 Six Months Ended
------------------- ------------------
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
-------- -------- -------- --------
United States $13,289 $12,878 $26,591 $25,504
Americas excluding United States 835 695 1,644 1,809
Europe 1,164 1,378 2,244 2,401
Other 618 921 1,165 1,373
------- ------- ------- -------
$15,906 $15,872 $31,644 $31,087
======= ======= ======= =======
9. Subsequent Events
On July 31, 2003, the Company announced that its Board of Directors had declared
a semi-annual cash dividend of $0.10 per share, to be payable September 12, 2003
to stockholders of record at the close of business on August 22, 2003.
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 June 30, 2003 and 2002 were $15.9 million. Revenues for the six
months ended June 30, 2003 were $31.6 million, an increase of 2% from $31.1
million in the same period in 2002. The increase of $557,000 for the six months
ended June 30, 2003 was primarily due to the acquisition of DBC and increased
demand for the Company's outsourcing services offset by decreases in
professional services revenues. DBC was acquired in the fourth quarter of 2002.
Software Licenses. Software license revenues for the three and six months ended
June 30, 2003 were $3.7 million and $7.1 million, respectively, representing
decreases of 11% and 4% from the $4.2 million and $7.4 million, respectively,
for the comparable periods in 2002. The decrease in license revenues for the
three months ended June 30, 2003 was due primarily to lower sales of Antares and
LMS, partially offset by the acquisition of DBC and higher sales of CAMRA and
PTS. The decrease in license revenues for the six months ended June 30, 2003 was
due primarily to lower sales of CAMRA, Antares, and LMS, partially offset by the
acquisition of DBC and higher sales of AdvisorWare.
Maintenance. Maintenance revenues for the three months ended June 30, 2003 were
$7.7 million, representing an increase of 13% over the $6.8 million for the same
period in 2002. Maintenance revenues for the six months ended June 30, 2003 were
$15.3 million, representing an increase of 13% over the $13.6 million for the
same period in 2002. The increases for the three and six months ended June 30,
2003 were mainly attributable to the acquisition of DBC.
Professional Services. Professional services revenues for the three and six
months ended June 30, 2003 were $1.3 million and $2.9 million, respectively,
representing decreases of 20% and 17% from the $1.6 million and $3.5 million,
respectively, in the comparable periods in 2002. The decreases were primarily
due to a decrease in demand for the Company's implementation, conversion, and
training services.
Outsourcing. Outsourcing revenues for the three months ended June 30, 2003 were
$3.2 million, representing a decrease of 3% from the $3.3 million in the
comparable period of the prior year. Outsourcing revenues for the six months
ended June 30, 2003 were $6.3 million, representing a decrease of 4% from the
$6.6 million in the comparable period in 2002. The decrease in outsourcing
revenues for the three months ended June 30, 2003 was due primarily to lower
sales of PortPro
9
due to a restructuring of the services offered by that product, offset by
increased demand for SS&C Direct and AdvisorWare outsourcing services. The
decrease in outsourcing revenues for the six months ended June 30, 2003 was
primarily due to lower sales of PortPro offset by increased demand for SS&C
Direct and AdvisorWare services and the addition of Lightning outsourcing
services, which was released in the second half of 2002.
Cost of Revenues
Total cost of revenues decreased 3% to $5.1 million for the three months ended
June 30, 2003 from $5.2 million for the three months ended June 30, 2002. Total
cost of revenues decreased 3% to $10.2 million for the six months ended June 30,
2003 from $10.5 million for the six months ended June 30, 2002. The gross margin
increased to 68% in the three months ended June 30, 2003 from 67% in the
comparable period in 2002. For the six months ended June 30, 2003, the gross
margin increased to 68% from 66% in the comparable period in 2002. This gross
margin increase in both the three and six months ended June 30, 2003 was due to
improvements in the maintenance and outsourcing margins, offset by decreases in
the margins for software licenses.
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 39% to $423,000 for the three months ended June
30, 2003 from $305,000 in the same period in 2002. Cost of software licenses
increased 50% to $942,000 for the six months ended June 30, 2003 from $628,000
in the six months ended June 30, 2002, and represented 13% and 9% of license
revenues in those periods, respectively. The increases in costs for both the
three and six months ended June 30, 2003 were mainly due to the increase in
amortization of completed technology associated with the acquisition of DBC.
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 increased 8% to $1.5 million in the
three months ended June 30, 2003 from $1.4 million in the three months ended
June 30, 2002. The cost of maintenance increased 6% to $3.0 million in the six
months ended June 30, 2003 from $2.8 million in the six months ended June 30,
2002. The increases for both the three and six months ended June 30, 2003 were
primarily 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% to $1.1 million for the
three months ended June 30, 2003 from $1.3 million in the same period in 2002,
representing 89% and 85% of professional service revenues in those quarters,
respectively. Cost of professional services revenues decreased 17% to $2.3
million for the six months ended June 30, 2003 from $2.7 million in the six
months ended June 30, 2002, both represented 78% of professional services
revenues in each of those periods. 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 7% to $2.0 million for the three
months ended June 30, 2003 from $2.2 million in the same period in 2002,
representing 64% and 66% of outsourcing revenues in those quarters,
respectively. Cost of outsourcing in the six months ended June 30, 2003 and 2002
was $4.0 million and $4.3 million, respectively, representing 64% and 66% 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 12% to $6.6 million in the three months ended
June 30, 2003 from $7.5 million in the three months ended June 30, 2002,
representing 42% and 47% of total revenues in those periods, respectively. Total
operating expenses decreased 19% to $13.7 million in the six months ended June
30, 2003 from $16.8 million in the six months ended June 30, 2002, representing
43% and 54% of total revenues in those periods, respectively. Included in the
six-month 2002 expenses 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, offset
by the addition of operating expenses of the DBC business and an increase in bad
debt expense.
10
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 18% to
$2.0 million in the three months ended June 30, 2003 from $2.5 million in the
three months ended June 30, 2002, representing 13% and 16%, respectively, of
total revenues for those periods. These expenses decreased 19% to $4.1 million
in the six months ended June 30, 2003 from $5.1 million in the same period in
2002, representing 13% and 17%, respectively, of total revenues for those
periods. The decreases for the three and six months ended June 30, 2003 were
mainly due to lower personnel-related costs associated with the reduction in the
number of marketing personnel, and lower marketing and promotional and travel
costs offset by additional costs as a result of the acquisition of DBC.
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 decreased 7%
to $2.9 million in the three months ended June 30, 2003 from $3.1 million in the
three months ended June 30, 2002, representing 18% and 20% of total revenues in
those periods, respectively. Expenses decreased 1% to $5.9 million in the six
months ended June 30, 2003 from $6.0 million in the same period in 2002,
representing 19% of total revenues for both periods. The decrease was mainly due
to cost reductions in personnel and other related support costs partially offset
by DBC-related 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 11% to $1.7 million in the three months ended
June 30, 2003 from $1.9 million in the three months ended June 30, 2002,
representing 11% and 12%, respectively, of total revenues for those periods. The
decrease was primarily due to lower personnel related costs and a decrease in
depreciation expense. These expenses decreased 7% to $3.7 million in the six
months ended June 30, 2003 from $3.9 million in the same period in 2002,
representing 12% and 13%, respectively, of total revenues for those periods.
This year-to-date decrease was mainly attributable to lower personnel related
costs and a reduction in depreciation expense partially offset by an increase in
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 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 (Expense), Net. Interest and other income (expense),
net consists primarily of interest income and other non-operational income and
expenses. Interest income was $235,000 for the three months ended June 30, 2003
compared to $399,000 in the same period in 2002. Interest income decreased 42%
to $484,000 in the six months ended June 30, 2003 from $841,000 in the same
period in 2002. The decreases in interest income for both the three and six
months ended June 30, 2003 were primarily due to lower market interest rates on
investments. Included in other expense, net for the three and six months ended
June 30, 2003 were gains on sales of investments of $87,000 and $88,000,
respectively. Included in other expense, net for the three and six months ended
June 30, 2002 was a non-operational $854,000 impairment charge associated with
the decline in the market value of a bond held in the Company's investment
portfolio. Also, included in other expense, net for the six months ended June
30, 2002 was a gain of $486,000 resulting from the sale of marketable
securities.
Provision for Income Taxes. The Company had an effective tax rate of 39% and 40%
in the six months ended June 30, 2003 and 2002, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and marketable securities at June 30, 2003
were $46.2 million, which is an increase of $4.5 million from the $41.7 million
at December 31, 2002. The increase was primarily due to earnings, the collection
of annual maintenance fees billed during the first quarter and proceeds from the
exercise of employee options partially offset by cash used under the Company's
stock repurchase program.
Net cash provided by operating activities was $9.7 million for the six months
ended June 30, 2003. Cash provided by operating activities was primarily due to
earnings adjusted for non-cash items and an increase in deferred maintenance and
11
other revenues. These items were partially offset by a decrease in accrued
expenses.
Investing activities used net cash of $3.1 millions for the six months ended
June 30, 2003. Cash used in investing activities was primarily due to $2.7
million in net purchases of marketable securities.
Financing activities used net cash of $6.1 million for the six months ended June
30, 2003. Cash used in financing activities was primarily due to the Company's
activities under its stock repurchase program partially offset by proceeds from
the exercise of employee options. The Company repurchased 742,000 shares of
common stock for treasury in the six months ended June 30, 2003 for a total cost
of $9.4 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 June 30, 2003,
the Company did 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,
professional services and outsourcing; 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.
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 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
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.
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 professional 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
12
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 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,
13
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 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
June 30, 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
The Company's management, with the participation of the Company's chief
executive officer and chief financial officer, evaluated the effectiveness of
the Company's disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934) as of June 30, 2003.
Based on this evaluation, the Company's chief executive officer and chief
financial officer concluded that, as of June 30, 2003, the Company's disclosure
controls and procedures were (1) designed to ensure that material information
relating to the Company, including its consolidated subsidiaries, is made known
to the Company's chief executive officer and chief financial officer by others
within those entities, particularly during the period in which this report was
being prepared, and (2) effective, in that they provide reasonable assurance
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 rules and forms of the
Securities and Exchange Commission.
No change in the Company's internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the
fiscal quarter ended June 30, 2003 that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
14
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the 2003 annual meeting of stockholders of the Company (the "Annual Meeting")
held on May 22, 2003, the following matters were acted upon by the stockholders
of the Company:
1. The election of Albert L. Lord and Jonathan M. Schofield as Class I
directors for the ensuing three years;
2. The amendment of the Company's 1998 Stock Incentive Plan to increase
the number of shares of the Company's common stock authorized for
issuance thereunder from 2,500,000 to 3,500,000 shares;
3. The amendment of the Company's 1996 Employee Stock Purchase Plan to
increase the number of shares of the Company's common stock authorized
for issuance thereunder from 600,000 to 800,000 shares; and
4. 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 11,825,162. The other directors of
the Company, whose terms of office as directors continued after the Annual
Meeting, are Joseph H. Fisher, David W. Clark, Jr., Patrick J. McDonnell,
William C. Stone, and James L. Sullivan 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:
Albert L. Lord 11,499,860 325,302 0 0 none
Jonathan M. Schofield 11,499,860 325,302 0 0 none
Amendment of the 1998 Stock Incentive Plan 9,300,942 N/A 2,520,540 3,680 none
Amendment of the 1996 Employee Stock Purchase Plan 11,759,704 N/A 58,957 6,501 none
Ratification of PricewaterhouseCoopers LLP 10,357,084 N/A 1,467,178 900 none
15
ITEM 6. EXHIBIT AND REPORTS OF FORM 8-K
a. The exhibits listed in the Exhibit Index immediately preceding such exhibits
are filed as part of this Report.
b. On April 16, 2003, the Company furnished a Current Report on Form 8-K, dated
April 16, 2003, to report under Item 9 (Regulation FD Disclosure (Information
Furnished Pursuant to Item 12, "Results of Operations and Financial
Condition")) the Company's press release announcing the first quarter
results.
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 14, 2003 By: /s/ Patrick J. Pedonti
Patrick J. Pedonti
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
17
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
10.1 1998 Stock Incentive Plan, as amended, incorporated by reference to Appendix A of the
Registrant's Definitive Proxy Statement for Its Annual Meeting of Stockholders Held on May 22,
2003 (File No. 000-28430).
10.2 1996 Employee Stock Purchase Plan, as amended, incorporated by reference to Appendix B of
the Registrant's Definitive Proxy Statement for Its Annual Meeting of Stockholders Held
on May 22, 2003 (File No. 000-28430).
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
18