SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) | ||
x | Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period endedJune 30, 2001 or | |
o | Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to | |
Commission file number1-12989 |
SunGard® Data Systems Inc. | ||
(Exact name of registrant as specified in its charter) | ||
Delaware | 51-0267091 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |
1285 Drummers Lane, Wayne, Pennsylvania 19087 | ||
(Address of principal executive offices, including zip code) | ||
(610) 341-8700 | ||
(Registrant's telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx Noo
There were 278,702,794 shares of the registrant's common stock, par value $.01 per share, outstanding at June 30, 2001.
SUN GARD DATA SYSTEMS INC.
AND SUBSIDIARIES
INDEX
PAGE | ||
PART I. | FINANCIAL INFORMATION | |
Item 1. | Financial Statements: | |
Consolidated Balance Sheets as of June 30, 2001 (unaudited) and December 31, 2000 | 1 | |
Consolidated Statements of Income for the six and three months ended June 30, 2001 and 2000 (unaudited) | 2 | |
Consolidated Statements of Cash Flows for the six months ended June 30, 2001 and 2000 (unaudited) | 3 | |
Notes to Consolidated Financial Statements (unaudited) | 4 | |
Item 2. | Management's Discussion and Analysis of Financial Conditionand Results of Operations | 9 |
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 15 |
PART II. | OTHER INFORMATION | |
Item 1. | Legal Proceedings | 15 |
Item 2. | Changes in Securities and Use of Proceeds | 15 |
Item 3. | Defaults upon Senior Securities | 15 |
Item 4. | Submission of Matters to a Vote of Security Holders | 15 |
Item 5. | Other Information | 16 |
Item 6. | Exhibits and Reports on Form 8-K | 16 |
SIGNATURES | 17 |
June 30, 2001 (Unaudited) | December 31, 2000 | |||||||
---|---|---|---|---|---|---|---|---|
Assets | ||||||||
Current: | ||||||||
Cash and equivalents | $ | 416,388 | $ | 255,835 | ||||
Short-term investments | 166,739 | 180,234 | ||||||
Trade receivables, less allowance for doubtful accounts of $22,788 and $25,126 | 349,891 | 359,597 | ||||||
Earned but unbilled receivables | 53,403 | 56,018 | ||||||
Prepaid expenses and other current assets | 49,903 | 43,099 | ||||||
Deferred income taxes | 11,751 | 16,959 | ||||||
Total current assets | 1,048,075 | 911,742 | ||||||
Investment in common stock | — | 9,114 | ||||||
Property and equipment, less accumulated depreciation of $409,939 and $377,268 | 237,223 | 208,580 | ||||||
Software products, less accumulated amortization of $200,733 and $179,980 | 145,345 | 150,290 | ||||||
Goodwill, less accumulated amortization of $105,516 and $76,352 | 307,418 | 296,864 | ||||||
Other tangible and intangible assets, less accumulated amortization of $92,921 and $90,473 | 127,057 | 127,431 | ||||||
Deferred income taxes | 136,779 | 141,164 | ||||||
$ | 2,001,897 | $ | 1,845,185 | |||||
Liabilities and Stockholders’ Equity | ||||||||
Current: | ||||||||
Short-term and current portion of long-term debt | $ | 6,591 | $ | 5,908 | ||||
Accounts payable | 18,425 | 20,890 | ||||||
Accrued compensation and benefits | 85,417 | 109,858 | ||||||
Other accrued expenses | 51,643 | 58,963 | ||||||
Accrued income taxes | 16,414 | 14,314 | ||||||
Deferred revenues | 199,255 | 184,837 | ||||||
Total current liabilities | 377,745 | 394,770 | ||||||
Long-term debt | 3,288 | 7,939 | ||||||
Commitments | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock, par value $.01 per share; 5,000 shares authorized, of which 3,200 is designated as Series A Junior Participating Preferred stock | — | — | ||||||
Common stock, par value $.01 per share; 800,000 shares authorized; 279,354 and 133,654 shares issued | 2,794 | 1,337 | ||||||
Capital in excess of par value | 720,652 | 659,404 | ||||||
Restricted stock plans and notes receivable for common stock | (3,584 | ) | (941 | ) | ||||
Retained earnings | 943,217 | 820,067 | ||||||
Accumulated other comprehensive loss | (27,468 | ) | (22,680 | ) | ||||
1,635,611 | 1,457,187 | |||||||
Treasury stock, at cost, 651 and 325 shares | (14,747 | ) | (14,711 | ) | ||||
Total stockholders’ equity | 1,620,864 | 1,442,476 | ||||||
$ | 2,001,897 | $1,845,185 | ||||||
Six Months Ended June 30, | Three Months Ended June 30, | |||||||||||||||
2001 | 2000 | 2001 | 2000 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Revenues: | ||||||||||||||||
Services | $ | 807,393 | $ | 668,102 | $ | 411,991 | $ | 338,863 | ||||||||
License and resale fees | 95,593 | 117,659 | 50,180 | 62,233 | ||||||||||||
902,986 | 785,761 | 462,171 | 401,096 | |||||||||||||
Costs and expenses: | ||||||||||||||||
Cost of sales and direct operating | 357,381 | 318,694 | 177,802 | 154,427 | ||||||||||||
Sales, marketing and administration | 195,284 | 174,544 | 97,837 | 89,159 | ||||||||||||
Product development | 83,981 | 69,210 | 42,294 | 35,031 | ||||||||||||
Depreciation and amortization | 46,661 | 42,848 | 24,629 | 22,101 | ||||||||||||
Amortization of acquisition-related intangible assets | 31,425 | 27,849 | 16,308 | 14,720 | ||||||||||||
Merger costs | 1,829 | 2,756 | 1,829 | 1,156 | ||||||||||||
716,561 | 635,901 | 360,699 | 316,594 | |||||||||||||
Income from operations | 186,425 | 149,860 | 101,472 | 84,502 | ||||||||||||
Interest income | 14,623 | 10,634 | 7,505 | 5,267 | ||||||||||||
Interest expense | (1,305 | ) | (768 | ) | (784 | ) | (311 | ) | ||||||||
Income before income taxes | 199,743 | 159,726 | 108,193 | 89,458 | ||||||||||||
Income taxes | 81,509 | 64,530 | 43,913 | 35,783 | ||||||||||||
Net income | $ | 118,234 | $ | 95,196 | $ | 64,280 | $ | 53,675 | ||||||||
Basic net income per common share | $ | 0.43 | $ | 0.36 | $ | 0.23 | $ | 0.20 | ||||||||
Diluted net income per common share | $ | 0.42 | $ | 0.35 | $ | 0.22 | $ | 0.20 | ||||||||
Shares used to compute net income per common share: | ||||||||||||||||
Basic | 272,546 | 262,948 | 277,596 | 263,408 | ||||||||||||
Diluted | 282,400 | 269,170 | 287,403 | 269,946 | ||||||||||||
Six Months Ended June 30, | ||||||||
2001 | 2000 | |||||||
Cash flow from operations: | ||||||||
Net income | $ | 118,234 | $ | 95,196 | ||||
Reconciliation of net income to cash flow from operations: | ||||||||
Depreciation and amortization | 78,086 | 70,697 | ||||||
Other noncash credits | (5,230 | ) | (2,702 | ) | ||||
Deferred income tax expense (benefit) | 6,096 | (2,890 | ) | |||||
Accounts receivable and other current assets | 20,650 | 8,236 | ||||||
Accounts payable and accrued expenses | (26,890 | ) | (29,966 | ) | ||||
Deferred revenues | 11,394 | (7,389 | ) | |||||
Cash flow from operations | 202,340 | 131,182 | ||||||
Financing activities: | ||||||||
Cash received under employee stock plans | 35,304 | 19,702 | ||||||
Cash paid to repay debt | (17,110 | ) | (6,531 | ) | ||||
Total financing activities | 18,194 | 13,171 | ||||||
Investment activities: | ||||||||
Cash paid for acquired businesses, net of cash acquired | (4,517 | ) | (115,797 | ) | ||||
Cash paid for property and equipment | (65,153 | ) | (43,075 | ) | ||||
Cash paid for software and other assets | (20,393 | ) | (22,102 | ) | ||||
Cash paid for purchases of short-term investments | (123,535 | ) | (50,638 | ) | ||||
Cash received from sale of long-term investment | 16,057 | — | ||||||
Cash received from sales and maturities of short-term investments | 137,560 | 41,821 | ||||||
Total investment activities | (59,981 | ) | (189,791 | ) | ||||
Increase (decrease) in cash and equivalents | 160,553 | (45,438 | ) | |||||
Beginning cash and equivalents | 255,835 | 286,990 | ||||||
Ending cash and equivalents | $ | 416,388 | $ | 241,552 | ||||
Supplemental information: | ||||||||
Acquired businesses: | ||||||||
Property and equipment | $ | 3,203 | $ | 2,511 | ||||
Software products | 4,814 | 36,400 | ||||||
Goodwill and tangible and intangible assets | 24,236 | 104,450 | ||||||
Deferred income taxes | — | (835 | ) | |||||
Purchase price obligations and debt assumed | (13,156 | ) | (11,502 | ) | ||||
Net current liabilities assumed | (117 | ) | (12,728 | ) | ||||
Common stock issued and net equity acquired in poolings of interests | (14,463 | ) | (2,499 | ) | ||||
Cash paid for acquired businesses, net of cash acquired | $ | 4,517 | $ | 115,797 | ||||
SUN GARD DATA SYSTEMS INC.
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED )
1. Basis of Presentation:
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America. Interim financial reporting does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. All significant intercompany transactions and accounts have been eliminated. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included in the accompanying financial statements. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Future events could cause actual results to differ from those estimates. Operating results for the six and three month periods ended June 30, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. The information included in this Form 10-Q should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and with the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2000.
2. Acquisitions:
Pooling-of-Interests Transactions:
During the second quarter 2001, the Company completed one acquisition in its investment support systems business accounted for as a pooling of interests. A total of 8.2 million shares of common stock were issued in connection with this acquisition, and outstanding options to buy shares of the acquired company were converted into options to buy 1.3 million shares of the Company's common stock.
During the six months ended June 30, 2000, the Company completed one acquisition in its investment support systems business accounted for as a pooling of interests. A total of 4.4 million shares of common stock were issued in connection with this acquisition, and outstanding options to buy shares of the acquired company were converted into options to buy 0.6 million shares of the Company's common stock.
The pooling-of-interests transactions described above were not material and have been recorded as of the beginning of the quarter in which each acquisition was completed. Except for the merger costs described below, the Company does not expect that the immaterial acquisitions, individually or in the aggregate, will have a material effect on its financial condition or results of operations.
Purchase Transactions:
During the six months ended June 30, 2001, the Company completed three acquisitions accounted for as purchases. Total cash paid in connection with the three acquisitions was $6.9 million, subject to certain adjustments.
2. Acquisitions, continued:
Purchase Transactions, continued:
During the six months ended June 30, 2000, the Company completed six acquisitions accounted for as purchases. Total cash paid in connection with the six acquisitions was $115.1 million, subject to certain adjustments.
At June 30, 2000, the allocation of the purchase price of Global Information Solutions Ltd. (GIS) was still preliminary. The final allocation resulted in a charge of $5.2 million for purchased in-process research and development. This charge, equal to approximately 7% of the cash paid, represents, as of the date of acquisition, the value of software products still in development but not considered to have reached technological feasibility or to have any alternative future use. The amount allocated to purchased in-process research and development is based on independent appraisals, which include an analysis of the business and expected cash flows, along with the risks associated with completing the development projects and attaining the expected cash flows.
Merger Costs:
During the six months ended June 30, 2001, the Company recorded net merger costs of $1.8 million ($2.7 million after-tax, or $0.01 per diluted share). These merger costs are associated with a pooling-of-interests transaction and costs associated with the attempted acquisition of certain assets of Bridge Information Systems, Inc. (Bridge), reduced by the $5.0 million break-up fee paid to the Company in connection with the attempted acquisition of Bridge. The costs include investment banking, legal and accounting fees that generally are not deductible for income tax purposes.
During the six months ended June 30, 2000, the Company recorded merger costs of $2.8 million ($2.3 million after tax, or $0.01 per diluted share). The merger costs are associated with pooling-of-interests transactions, and principally include investment banking, legal, accounting and printing fees that generally are not deductible for income tax purposes.
3. Common Stock Split:
On May 11, 2001, the Company's board of directors authorized a two-for-one stock split of the Company's common stock. Stockholders of record as of the close of business on May 25, 2001 received one additional share of SunGard stock for every share held on that date. The effective date for the stock split was June 18, 2001. The number of shares used for purposes of calculating net income per common share and all per share data and other disclosures have been adjusted for all periods presented to reflect the stock split.
4. Comprehensive Income:
Comprehensive income consists of net income, adjusted for other increases and decreases affecting stockholders' equity that are excluded from the determination of net income. The calculation of comprehensive income for the six and three months ended June 30, 2001 and 2000 follows (in thousands):
Six Months Ended | Three Months Ended | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
June 30, | June 30, | |||||||||||||||
2001 | 2000 | 2001 | 2000 | |||||||||||||
Net income | $ | 118,234 | $ | 95,196 | $ | 64,280 | $ | 53,675 | ||||||||
Foreign currency translation loss | (9,051 | ) | (5,190 | ) | (1,210 | ) | (2,678 | ) | ||||||||
Unrealized gains (losses) on marketable securities | 6,559 | (26,536 | ) | 8,558 | (51,653 | ) | ||||||||||
Income tax benefit (expense) | (2,296 | ) | 9,287 | (2,996 | ) | 18,078 | ||||||||||
Comprehensive net income | $ | 113,446 | $ | 72,757 | $ | 68,632 | $ | 17,422 | ||||||||
The unrealized gains (losses) on marketable securities result primarily from the Company's investment in approximately 16.5% of the common stock in Tecnomatix Technologies Ltd. (NASDAQ: TCNO). The investment, which had been classified as an investment held for sale, was sold during the second quarter of 2001. The gain on sale is included in interest income and is not material.
5. Long-term Investments:
As of June 30, 2001, the Company has two long-term minority investments included in other tangible and intangible assets at a cost of $14.9 million. Each investment has an operational relationship with at least one of the Company's business units. In order to assess the recoverability of these assets, the Company regularly reviews their operating plans and budgets as compared with actual results as well as additional investments made by third parties. While neither of these companies is generating positive cash flow from operations, both continue to execute their business plans.
6. Shares Used in Computing Net Income Per Common Share:
The computation of shares used in computing pro forma basic and diluted net income per common share for each of the six and three months ended June 30, 2001 and 2000 follows (in thousands):
Six Months Ended | Three Months Ended June 30, | ||||||||
---|---|---|---|---|---|---|---|---|---|
2001 | 2000 | 2001 | 2000 | ||||||
Weighted average common shares outstanding | 272,546 | 262,740 | 277,596 | 263,408 | |||||
Contingent shares | — | 208 | — | — | |||||
Total shares used for calculation of basic net income per common share | 272,546 | 262,948 | 277,596 | 263,408 | |||||
Employee stock options | 9,854 | 6,222 | 9,807 | 6,538 | |||||
Total shares used for calculation of diluted net income per common share | 282,400 | 269,170 | 287,403 | 269,946 | |||||
7. Operating Segments:
The Company's three operating segments consist of its investment support systems (ISS) business, business continuity and Internet services (BCIS) business, and a third segment referred to as Other Businesses. The Company's operating segments are groups of businesses that offer similar products and services. The segments are managed separately since each business requires different technology and marketing strategies.
ISS designs, markets and maintains a comprehensive set of propriety software applications that are delivered to customers on license and application-service-provider bases. The fundamental purpose of these systems is to automate the complex transaction processing associated with investment operations. BCIS provides customers with business continuity services and high-availability infrastructure, enabling customers to have around-the-clock access to business-critical information. BCIS also provides Web-hosting and co-location services, as well as outsourcing and remote-access computer services. Other Businesses is comprised of a business that provides a work-flow management system, which increases efficiency and flexibility in managing healthcare insurance organizations, and an automated mailing-services business.
Six Months Ended June 30, | Three Months Ended June 30, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2001 | 2000 | 2001 | 2000 | |||||||||||||
Revenues: | ||||||||||||||||
Investment support systems | $ | 664,107 | $ | 572,919 | $ | 341,080 | $ | 291,564 | ||||||||
Business continuity and Internet services | 222,682 | 196,942 | 112,911 | 100,579 | ||||||||||||
Other businesses | 16,197 | 15,900 | 8,180 | 8,953 | ||||||||||||
$ | 902,986 | $ | 785,761 | $ | 462,171 | $ | 401,096 | |||||||||
Income from operations: | ||||||||||||||||
Investment support systems(1) | $ | 134,513 | $ | 106,170 | $ | 75,174 | $ | 59,444 | ||||||||
Business continuity and Internet services | 62,883 | 49,650 | 30,905 | 28,202 | ||||||||||||
Other businesses | 5,240 | 4,554 | 3,002 | 3,128 | ||||||||||||
Corporate administration | (16,211 | ) | (10,514 | ) | (7,609 | ) | (6,272 | ) | ||||||||
$ | 186,425 | $ | 149,860 | $ | 101,472 | $ | 84,502 | |||||||||
(1) | Includes merger costs of $1.8 million during the six and three months ended June 30, 2001, and $2.8 million and $1.2 million during the six and three months ended June 30, 2000, respectively. |
8. Stock Buy Back:
On August 22, 2000, the Company announced that its board of directors authorized the Company to purchase up to 4.0 million shares (as adjusted for the June 2001 two-for-one stock split) of its common stock through August 18, 2001. Through May 31, 2001, there were 0.6 million shares of the Company's common stock purchased under this plan. The repurchases were made from time to time in the open market, at the discretion of management. Shares purchased under this plan will be used for the Company's equity incentive and employee stock purchase plans and other general corporate purposes. On May 31, 2001, the Company rescinded its stock repurchase plan in order to complete an acquisition accounted for as a pooling of interests.
Item 2. MANAGEMENT'S DISCUSSIONAND ANALYSISOF FINANCIAL CONDITIONAND RESULTSOF OPERATIONS
Statements about the outlook of SunGard Data Systems Inc. (the Company) and all other statements in this quarterly report on Form 10-Q other than historical facts are forward-looking statements. Since these statements involve risks and uncertainties and are subject to change at any time, actual results could differ materially from expected results. Forward-looking statements include information about possible or assumed future financial results of the Company and usually contain words such as "believes," "intends," "expects," "anticipates," or similar expressions. The Company derives most of its forward-looking statements from its operating budgets and forecasts, which are based upon many detailed assumptions. While the Company believes that its assumptions are reasonable, it cautions that there are inherent difficulties in predicting certain important factors, such as the timing and magnitude of software sales, the effect of general economic and market issues on software and services buying decisions, the timing and scope of technological advances, the integration and performance of acquired businesses, the prospects for future acquisitions, the ability to attract and retain key personnel, and the overall condition of the financial services industry. These factors, as and when applicable, are discussed in the Company's filings with the Securities and Exchange Commission, including its most recent Form 10-K, a copy of which may be obtained from the Company without charge.
During 2001 and 2000, the Company recorded merger costs associated with acquired businesses accounted for as poolings of interests and, in 2001, costs associated with the attempted acquisition of certain assets of Bridge Information Systems, Inc. (Bridge), reduced by the $5.0 million break-up fee paid to the Company in connection with the attempted acquisition of Bridge. See Note 2 of Notes to Unaudited Consolidated Financial Statements.
The following supplemental unaudited income statement information should be read along with the unaudited consolidated financial statements and notes thereto included in this report.
Six Months Ended June 30, | Three Months Ended June 30, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2001 | 2000 | 2001 | 2000 | |||||||||||||
Revenues: | ||||||||||||||||
Investment support systems | $ | 664,107 | $ | 572,919 | $ | 341,080 | $ | 291,564 | ||||||||
Business continuity and Internet services | 222,682 | 196,942 | 112,911 | 100,579 | ||||||||||||
Other businesses | 16,197 | 15,900 | 8,180 | 8,953 | ||||||||||||
$ | 902,986 | $ | 785,761 | $ | 462,171 | $ | 401,096 | |||||||||
Income from operations: | ||||||||||||||||
Investment support systems | $ | 134,513 | $ | 106,170 | $ | 75,174 | $ | 59,444 | ||||||||
Business continuity and Internet services | 64,712 | 52,406 | 32,734 | 29,358 | ||||||||||||
Other businesses | 5,240 | 4,554 | 3,002 | 3,128 | ||||||||||||
Corporate administration | (16,211 | ) | (10,514 | ) | (7,609 | ) | (6,272 | ) | ||||||||
188,254 | 152,616 | 103,301 | 85,658 | |||||||||||||
Merger costs | (1,829 | ) | (2,756 | ) | (1,829 | ) | (1,156 | ) | ||||||||
$ | 186,425 | $ | 149,860 | $ | 101,472 | $ | 84,502 | |||||||||
Operating margin (excluding merger costs): | ||||||||||||||||
Investment support systems | 20.3 | % | 18.5 | % | 22.0 | % | 20.4 | % | ||||||||
Business continuity and Internet services | 29.1 | % | 26.6 | % | 29.0 | % | 29.2 | % | ||||||||
Other businesses | 32.4 | % | 28.6 | % | 36.7 | % | 34.9 | % | ||||||||
Total | 20.8 | % | 19.4 | % | 22.4 | % | 21.4 | % | ||||||||
INCOMEFROM OPERATIONS:
The Company sells a significant portion of its products and services to the financial services industry and could be affected directly by the overall condition of that industry. The Company expects that the consolidation trend in the financial services industry will continue, but it is unable to predict what effect, if any, this trend may have on the Company.
Certain of the Company's investment support systems (ISS) businesses derive a significant portion of revenues from software sales. Since there are inherent difficulties in predicting the timing and magnitude of software sales, there is the potential for fluctuations in quarterly revenues and income.
The ISS business is comprised of groups of related businesses that sell software and related services to the financial services industry. The business continuity and Internet services (BCIS) business provides business continuity, Web-hosting, co-location, outsourcing and remote-access computer services. Historically, these businesses in the aggregate have met or exceeded expectations. During the first six months of 2001, despite a decline in total software license sales, overall results met expectations due primarily to continued growth in processing services and professional services revenues.
The Company expects that the full-year 2001 operating margin before merger costs will increase compared to 2000, but at a somewhat slower rate than in the recent past. The most important factors affecting the operating margin continue to be the timing and magnitude of software sales, the operating margins of newly acquired businesses, the rate of new contract signings and contract renewals, the level of product development spending, and the timing and magnitude of equipment and facilities expenditures.
Investment Support Systems (ISS):
The ISS operating margin is 20.3% and 22.0% for the six and three month periods ended June 30, 2001, respectively, compared to 18.5% and 20.4% for the comparable periods in 2000. The operating margin increased during 2001 due primarily to increases in recurring revenues with relatively low incremental costs in the brokerage and execution systems and investor accounting systems businesses and cost controls, offset in part by $20.9 million and $10.9 million declines in software license and resale fees during the six and three months periods, respectively.
The most important factors affecting the ISS operating margin continue to be the timing and magnitude of software sales, the operating margins of recently acquired businesses and the level of product development spending.
Business Continuity and Internet Services (BCIS):
The BCIS operating margin is 29.1% and 29.0% for the six and three month periods ended June 30, 2001, respectively, compared to 26.6% and 29.2% for the comparable periods in 2000. The increase in the operating margin in the six month period is due primarily to increases in revenues and the timing of equipment upgrades.
INCOMEFROM OPERATIONS,CONTINUED:
Business Continuity and Internet Services (BCIS), continued:
The most important factors affecting the BCIS operating margin are the rate of new contract signings and contract renewals, the timing and magnitude of equipment and facilities expenditures and thebenefit derived from the general industry trend of lower per-unit costs for technology. During the first six months of 2001, the Company completed the expansion of its Web-hosting and co-location services facility in Philadelphia, PA. This facility became operational during the second quarter of 2001.
REVENUES:
Total revenues for the six and three month periods ended June 30, 2001 increased $117.2 million, or 15%, and $61.1 million, or 15%, respectively, as compared with the corresponding periods in 2000. Excluding acquired businesses, revenues increased approximately 10% and 9% during the six and three month periods ended June 30, 2001, compared to 7% and 8% during the six and three month periods ended June 30, 2000.
Recurring revenues, derived from application processing services, business continuity and Internet services, professional services, software maintenance, and software and hardware rentals, increased 21% during the six month period ended June 30, 2001, to $807.4 million, or 89% of total revenues, compared to $668.1 million, or 85% of total revenues, during the comparable period in 2000. During the three month period ended June 30, 2001, recurring revenues increased 22% to $412.0 million, or 89% of total revenues, compared to $338.9 million, or 84% of total revenues, during the comparable period in 2000. The increases are due primarily to increases in recurring revenues from brokerage and execution systems, investor accounting systems and BCIS businesses, and recurring revenues from acquired companies.
Professional services revenues are $169.7 million and $86.7 million during the six and three month periods ended June 30, 2001, respectively, compared to $134.6 million and $70.3 million during the comparable periods in 2000. The increases are due primarily to increases in revenues from brokerage and execution systems and asset management systems businesses and professional services revenues from acquired businesses.
Nonrecurring revenues, derived from software licenses and resales of third-party software and hardware, are $95.6 million and $50.2 million during the six and three month periods ended June 30, 2001, respectively, compared to $117.7 million and $62.2 million during the comparable periods in 2000. Software license revenues included in license and resale fees are $81.0 million and $43.9 million during the six and three month periods ended June 30, 2001, respectively, compared to $100.9 million and $54.4 million during the comparable periods in 2000. The Company expects that, for the balance of 2001, software license fees will continue to be lower than in 2000 due primarily to lengthening sales cycles and delays in purchasing decisions caused by a general decline in overall economic conditions.
REVENUES,CONTINUED:
Investment Support Systems:
ISS revenues increased $91.2 million, or 16%, and $49.5 million, or 17%, during the six and three month periods ended June 30, 2001, respectively, compared to the corresponding periods in 2000. Excluding acquired businesses, ISS revenues increased approximately 10% and 9% during the six and three month periods ended June 30, 2001. The revenue growth during 2001 is due primarily to increases in revenues from the brokerage and execution systems business, although the rate of increase is somewhat slower than in the recent past.
During the six month period ended June 30, 2001, recurring ISS revenues increased $112.1 million, or 24%, while nonrecurring ISS revenues decreased $20.9 million, or 19%. During the three month period, recurring ISS revenues increased $60.4 million, or 26%, while nonrecurring ISS revenues decreased $10.9 million, or 19%. The increase in recurring revenues is due primarily to growth in the brokerage and execution and investor accounting systems businesses and to acquired businesses. The decrease in nonrecurring revenues is due primarily to lower software license revenues during 2001 as a result of a contract cancellation fee in 2000 and lower software license revenues from investor accounting systems and banking and treasury systems businesses.
Business Continuity and Internet Services:
BCIS revenues increased $25.7 million, or 13%, and $12.3 million, or 12%, during the six and three month periods ended June 30, 2001, respectively, compared to the corresponding periods in 2000. The increases are due primarily to increases in revenues resulting from new contract signings and contract renewals and continued growth in demand for midrange platforms, network services and work-group recovery, partially offset by lower termination fees.
COSTSAND EXPENSES:
Cost of sales and direct operating expenses for the six and three month periods ended June 30, 2001 increased $38.7 million, or 12%, and $23.4 million, or 15%, respectively, compared to the corresponding periods in 2000. The increases are due primarily to acquired businesses and equipment upgrades.
Sales, marketing and administration expenses for the six and three month periods ended June 30, 2001 increased $20.7 million, or 12%, and $8.7 million, or 10%, respectively, compared to the corresponding periods in 2000. The increases are due primarily to acquired businesses and the Company's new global account management and corporate marketing programs, partially offset by lower sales and marketing costs in BCIS and certain ISS businesses.
Product development expenses for the six and three month periods ended June 30, 2001 increased $14.8 million, or 21%, and $7.3 million, or 21%, compared to the corresponding periods in 2000. The increases are due primarily to acquired businesses and various ISS product development initiatives. Gross
COSTSAND EXPENSES,CONTINUED:
development costs capitalized during the six and three month periods ended June 30, 2001 are $5.2 million and $2.5 million, respectively, compared to $4.1 million and $2.9 million during the comparable periods in 2000. During the six and three month periods ended June 30, 2001, amortization of previously capitalized development costs, included in depreciation and amortization, are $3.3 million and $1.7 million, respectively, compared to $2.8 million and $1.5 million during the comparable periods in 2000.
Depreciation and amortization for the six and three month periods ended June 30, 2001 increased $3.8 million, or 9%, and $2.5 million, or 11%, respectively, compared to the corresponding periods in 2000. The increases are due primarily to equipment purchases and acquired businesses.
Amortization of all acquisition-related intangible assets for the six and three month periods ended June 30, 2001 are $31.4 million and $16.3 million, respectively ($0.07 and $0.04 per diluted share, respectively), compared to $27.8 million and $14.7 million during the comparable periods in 2000, respectively ($0.07 and $0.04 per diluted share, respectively). The increases are due to recently acquired businesses. Amortization of goodwill for the six and three month periods ended June 30, 2001 totaled $10.3 million and $5.7 million, respectively ($0.03 and $0.02 per diluted share, respectively), compared to $7.8 million and $3.6 million during the comparable periods in 2000, respectively ($0.02 and $0.01 per diluted share, respectively).
Interest income for the six and three month periods ended June 30, 2001 increased $4.0 million, or 38%, and $2.2 million, or 42%, respectively, compared to the corresponding periods in 2000. The increases are due to higher average cash and short-term investment balances and a gain on sale of an equity investment, partially offset by lower interest rates.
The Company's effective income tax rate was 40.8% for the six month period ended June 30, 2001. Excluding merger related costs, the Company's effective income tax rate was 40.0% for the six months ended June 30, 2001, compared to 40.0% during the six months ended June 30, 2000.
LIQUIDITYAND CAPITAL RESOURCES:
At June 30, 2001, cash and short-term investments are $583.1 million, an increase of $147.1 million from December 31, 2000. Cash flow from operations increased $71.2 million, reaching $202.3 million during the first six months of 2001. The Company has only $9.9 million of short- and long-term debt, while stockholders' equity exceeds $1.6 billion at June 30, 2001.
The Company expects that its existing cash resources and cash generated from operations for the foreseeable future will be sufficient to meet its operating requirements, contingent payments in connection with business acquisitions and ordinary capital spending needs. Furthermore, the Company has a $150.0 million credit agreement and believes that it has the capacity to secure additional credit or issue equity to finance additional capital needs.
Item 3. QUANTITATIVEAND QUALITATIVE DISCLOSURESABOUT MARKET RISK:
The Company has not recently used derivative financial instruments to manage risk exposures or for trading or speculative purposes. The Company invests available cash in short-term, highly liquid financial instruments, with a substantial portion of such investments having initial maturities of three months or less. While changes in interest rates could decrease the Company's interest income, the Company does not consider the interest rate risk for these investments to be material.
While approximately 20% of the Company's revenues come from sales to customers located outside of the United States, approximately one-half of those revenues are U.S. dollar-denominated sales by U.S.-based operations. For the Company's foreign operations, the Company generally matches local currency revenues with local currency costs. For these reasons, the Company does not believe that it has a material exposure to changes in foreign currency exchange rates.
Part II. OTHER INFORMATION:
Item 1. LEGAL PROCEEDINGS: None.
Item 2. CHANGESIN SECURITIESAND USEOF PROCEEDS:
(a) Not applicable.
(b) Not applicable.
(c) On May 31, 2001, the Company issued 8,277,346 shares of the Company's common stock in exchange for the outstanding capital stock of Loanet Holdings, Inc. ("Loanet"). These shares were issued in connection with a transaction exempt from the registration requirements of the Securities Act of 1933, as amended (the "Act"), pursuant to Section 4(2) of the Act, which exempts transactions by an issuer not involving any public offering. Each purchaser was a shareholder of Loanet and an accredited investor. The Company has filed a Registration Statement on Form S-3 covering the resale of such shares.
(d) Not applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES: None.
Item 4. SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS:
(a) The 2001 Annual Meeting of Stockholders of the registrant was held on May 11, 2001.
Part II. | Other Information, continued: | |||
Item 4. | Submission of Matters to a Vote of Security Holders, continued: | |||
(b) | At the 2001 Annual Meeting, the following were elected as directors (number of shares are adjusted for the two-for-one common stock split): |
Director | For | Withheld | |
Gregory S. Bentley | 228,927,200 | 11,042,884 | |
Michael C. Brooks | 228,958,950 | 11,011,134 | |
Cristóbal Conde | 172,336,752 | 67,633,332 | |
Albert A. Eisenstat | 228,893,376 | 11,076,708 | |
Bernard Goldstein | 227,411,238 | 12,558,846 | |
Till Guldimann | 171,308,136 | 68,661,948 | |
James L. Mann | 171,079,204 | 68,890,880 | |
Michael Roth | 226,418,808 | 13,551,276 | |
Malcolm I. Ruddock | 228,969,590 | 11,000,494 | |
Lawrence J. Schoenberg | 228,911,656 | 11,058,428 |
(c) | At the 2001 Annual Meeting, an amendment to the Company's Restated Certificate of Incorporation to increase the number of authorized shares of common stock by 480,000,000 was approved by the following vote (number of shares are adjusted for the two-for-one common stock split): |
Votes in favor | 195,720,808 | |
Votes against | 44,116,286 | |
Votes abstaining | 132,990 | |
Broker non-votes | 0 |
Item 5. | Other Information: None. | |||
Item 6. | Exhibits and Reports on Form 8-K: | |||
(a) Exhibits: None. | ||||
(b) Reports on Form 8-K: None. |
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.
SUN GARD DATA SYSTEMS INC. | |||
Date: August 14, 2001 | By: | s/ Michael J. Ruane Michael J. Ruane Senior Vice President-Finance and Chief Financial Officer (Principal Financial Officer) |