Exhibit 13.1
Portions of the Company's Annual Report to Stockholders
for the fiscal year ended December 31, 1997
Pro Forma Net Income in Pro Forma Diluted Net
Revenues in Millions of Dollars Millions of Dollars/(1)/ Income per Share in Dollars /(1)(3)/
93 381 35.1 .48
94 437 43.1 .56
95 533 52.9 .67
96 670 68.4 .79
97 862 86.5 .97
Financial Highlights
- --------------------------------------------------------------------------------
SELECTED FINANCIAL INFORMATION
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per-share amounts) 1993 1994 1995 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Income Statement Data/(2)(3)/
REVENUES $ 381,372 $ 437,190 $ 532,628 $ 670,309 $ 862,151
INCOME FROM OPERATIONS 59,645 70,326 80,076 59,786 134,045
NET INCOME 38,474 43,087 48,672 34,901 77,546
BASIC NET INCOME PER SHARE 0.55 0.57 0.63 0.41 0.89
DILUTED NET INCOME PER SHARE 0.52 0.56 0.61 0.41 0.87
PRO FORMA NET INCOME/(1)/ 35,103 43,087 52,910 68,369 86,541
PRO FORMA DILUTED NET INCOME PER SHARE/(1)/ 0.48 0.56 0.67 0.79 0.97
Balance Sheet Data
TOTAL ASSETS $ 418,135 $ 485,740 $ 579,734 $ 679,318 $ 786,334
TOTAL SHORT-TERM AND LONG-TERM DEBT 6,523 10,567 10,002 39,346 19,429
STOCKHOLDERS' EQUITY 316,960 359,292 422,292 464,638 559,046
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Excludes all items described in footnote 2.
(2) 1993 includes after-tax gain on sale of product line of $3,371 ($0.04 per
diluted share). 1995 includes merger costs of $4,238 ($0.05 per diluted
share). 1996 includes charges for purchased in-process research and
development and other costs of $51,083 ($33,468 after tax; $o.39 per diluted
share). 1997 includes charges for purchased in-process research and
development and merger costs of $12,808 ($8,995 after tax; $0.10 per diluted
share). See Note 2 of Notes to Consolidated Financial Statements.
(3) All per-share amounts have been adjusted for September 1997 and July 1995
two-for-one stock splits. See Note 3 of Notes to Consolidated Financial
Statements.
FINANCIAL TABLE OF CONTENTS
28 Quarterly Financial Information
28 Stock Information
29 Management's Discussion and Analysis of Financial Condition and Results of
Operations
33 Consolidated Statements of Income
34 Consolidated Balance Sheets
35 Consolidated Statements of Cash Flows
36 Consolidated Statement of Stockholders' Equity
38 Notes to Consolidated Financial Statements
44 Report of Independent Accountants
28.) 29 QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS) FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------------------------------------------------
1997: /(1)/
REVENUES $187,421 $207,651 $214,485 $252,594
INCOME BEFORE INCOME TAXES 30,461 24,352 38,826 40,065
NET INCOME 18,124 14,085 22,769 22,568
DILUTED NET INCOME
PER COMMON SHARE /(3)/ .21 .16 .26 .25
1996: /(2)/
REVENUES $149,798 $155,568 $171,646 $193,297
INCOME (LOSS) BEFORE INCOME TAXES 24,592 27,258 (14,078) 25,797
NET INCOME (LOSS) 14,632 16,219 (10,465) 14,515
DILUTED NET INCOME (LOSS)
PER COMMON SHARE /(3)/ .17 .19 (.12) .17
/(1)/ Includes second-quarter charges of $9,618 ($5,805 after tax; $0.07 per
diluted share) comprised of purchased in-process research and development
of $9,300 and merger costs associated with a pooling of interests of $318,
third-quarter merger costs associated with a pooling of interests of $338
(less than $0.01 per diluted share), and fourth-quarter merger costs
associated with poolings of interests of $2,852 ($0.03 per diluted share).
/(2)/ Includes third-quarter charges for purchased in-process research and
development and other costs of $44,032 ($28,287 after tax; $0.33 per
diluted share) and fourth-quarter charges for purchased in-process
research and development of $7,051 ($5,181 after tax; $0.06 per diluted
share).
/(3)/ All per-share amounts have been adjusted for a September 1997 two-for-one
stock split.
STOCK INFORMATION
The common stock of SunGard Data Systems Inc. is listed on the New York Stock
Exchange under the symbol SDS. At March 9, 1998, the Company had approximately
3,500 stockholders of record. No dividends have ever been paid on the Company's
common stock. The Company's policy is to retain earnings for use in its
business.
The following table indicates high and low sales prices per share of the
Company's common stock, as reported on the National Market of The Nasdaq Stock
Market through June 3, 1997 and the New York Stock Exchange thereafter. All
prices reflect the Company's September 1997 two-for-one stock split.
CALENDAR YEAR 1997
First Quarter $25 3/8 $18 1/2
Second Quarter 24 3/4 20 3/4
Third Quarter 27 1/8 23
Fourth Quarter 31 7/16 22 1/2
CALENDAR YEAR 1996
First Quarter $19 $13 3/4
Second Quarter 20 1/2 15 5/8
Third Quarter 23 3/8 17 11/16
Fourth Quarter 23 3/4 19 1/8
The last sale price of the Company's common stock on March 9, 1998, as
reported on the New York Stock Exchange, was $33 1/2 per share.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Statements about the Company's expectations and all other statements in this
Annual Report other than historical facts are forward-looking statements. Since
these statements involve risks and uncertainties and are subject to change at
any time, the Company's actual results could differ materially from expected
results. 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,
especially the timing and magnitude of software sales, the timing and scope of
technological advances and year 2000 compliance, the integration and performance
of acquired businesses, the prospects for future acquisitions, 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 Form 10-K for the year ended December 31,
1997, a copy of which may be obtained from the Company without charge.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
amounts included in the Consolidated Statements of Income of SunGard Data
Systems Inc., the relative percentage that those amounts represent to
consolidated revenues (unless otherwise indicated), and the percentage change in
those amounts from period to period.
YEAR ENDED DECEMBER 31, PERCENT OF REVENUES /(1)/ PERCENT
(IN MILLIONS) YEAR ENDED DECEMBER 31, INCREASE (DECREASE) /(1)/
1997 1996 1995 1997 1996 1995 1997 1996
vs.1996 vs.1995
--------------------------------------------------------------------------------
REVENUES
INVESTMENT SUPPORT SYSTEMS $ 566.1 $ 412.3 $ 330.6 66% 61% 62% 37% 25%
DISASTER RECOVERY SERVICES 228.2 193.8 162.3 26 29 31 18 19
COMPUTER SERVICES AND OTHER 67.8 64.2 39.7 8 10 7 6 62
----------------------------------------------------------
$ 862.1 $ 670.3 $ 532.6 100% 100% 100% 29 26
----------------------------------------------------------
COSTS AND EXPENSES
COST OF SALES AND
DIRECT OPERATING $ 365.4 $ 291.6 $ 234.0 42% 43% 44% 25% 25%
SALES, MARKETING AND
ADMINISTRATION 176.6 135.4 109.2 21 20 21 30 24
PRODUCT DEVELOPMENT 78.5 61.5 50.4 9 9 9 28 22
DEPRECIATION 48.7 37.3 30.8 6 6 6 31 21
AMORTIZATION 46.1 33.6 23.9 5 5 4 37 41
PURCHASED IN-PROCESS
RESEARCH AND DEVELOPMENT
AND OTHER COSTS 12.8 51.1 4.2 1 8 1 -- --
----------------------------------------------------------
$ 728.1 $ 610.5 $ 452.5 84% 91% 85% 19 35
----------------------------------------------------------
OPERATING INCOME
INVESTMENT SUPPORT SYSTEMS/(2)/ $ 100.8 $ 68.1 $ 51.7 18% 17% 16% 48% 32%
DISASTER RECOVERY SERVICES/(2)/ 49.2 42.6 34.9 22 22 22 15 22
COMPUTER SERVICES AND OTHER/(2)/ 10.3 9.5 5.1 15 15 13 8 86
CORPORATE ADMINISTRATION (13.5) (9.3) (7.4) (2) (1) (1) 45 26
-------------------------------
146.8 110.9 84.3 17 17 16 32 32
PURCHASED IN-PROCESS
RESEARCH AND DEVELOPMENT
AND OTHER COSTS (12.8) (51.1) (4.2) (1) (8) (1) -- --
-------------------------------
$ 134.0 $ 59.8 $ 80.1 16 9 15 124 (25)
-------------------------------
(1) All percentages are calculated using actual amounts rounded to the nearest
$1,000.
(2) Percent of revenues is calculated as a percent of investment support
systems, disaster recovery services, and computer services and other revenues,
respectively.
30.) 31 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS CONTINUED
INCOME FROM OPERATIONS
During 1997 and 1996, the Company recorded $9.3 million and $44.5 million of
charges to operations ($0.06 and $0.32 per diluted share), respectively, for
purchased in-process research and development primarily associated with the 1997
acquisition of certain assets of Premier Solutions Ltd. and the 1996 acquisition
of NCS Financial Systems, Inc. (NCS). During 1996, the Company also recorded
$6.6 million of other charges ($0.07 per diluted share) primarily associated
with the impairment of the remaining intangible assets related to a business
acquired more than ten years ago. The following discussion of income from
operations excludes these charges, as well as merger costs associated with
poolings of interests of $3.5 million ($0.04 per diluted share) recorded during
1997 and $4.2 million ($0.05 per diluted share) recorded during 1995.
On January 2, 1998, the Company issued approximately 13.2 million shares of
its common stock in exchange for all of the outstanding shares of common stock
of Infinity Financial Technology, Inc. (Infinity) (See Note 2 of Notes to
Consolidated Financial Statements). Infinity derives a significantly larger
portion of its revenues from software license sales than does the Company. Since
there are inherent difficulties in predicting the timing and magnitude of
software sales, the potential for fluctuations in quarterly revenues and income
is expected to be greater than in the past.
Investment Support Systems (ISS)
The Company's ISS business is comprised of more than thirty-five operating units
of various size and complexity. Historically, most operating units have met or
exceeded expectations, while some have not, yielding overall results for the
entire business at approximately the levels expected. Since overall ISS results
reflect the sum of the diverse results of individual operating units, there
could be an adverse impact on ISS revenues and margins if too many individual
units are unable to meet expectations.
The ISS operating margin was 18% in 1997, compared with 17% in 1996 and 16%
in 1995. Both higher margins are due primarily to an increase in software
license revenues and cost reductions in three ISS businesses, which are net of
an overall increase in product development expense.
The Company expects that the full-year 1998 ISS operating margin will
increase slightly. The most important factors affecting the ISS operating margin
continue to be the timing and magnitude of software license revenues, the
operating margin of recently acquired businesses and the level of product
development spending.
Disaster Recovery Services (DRS)
The DRS operating margin remained at 22% in 1997, which is consistent with the
prior two years. Increased costs during 1997 were offset by an increase in
revenues resulting from new contract signings and contract renewals.
The Company expects the full-year 1998 DRS operating margin to remain
relatively consistent with the prior three years. The most important factors
affecting the DRS operating margin continue to be the rate of new contract
signings and contract renewals, the timing and magnitude of equipment and
facilities expenditures, and the performance of recently acquired businesses.
Computer Services and Other (CS)
The CS operating margin was 15% in both 1997 and 1996. The 1997 operating margin
reflects an increase in remote processing computer services revenues and cost
reductions in the Company's healthcare information systems (HIS) businesses that
were offset by higher operating costs due to computer services equipment
upgrades and, to a lesser extent, a decline in HIS revenues. The 1996 operating
margin increased from 13% in 1995 due primarily to an increase in remote-access
computer processing revenues and improved performance by the Company's HIS
businesses.
The Company expects that the full-year 1998 CS operating margin will increase
slightly. The most important factors affecting the CS operating margin are the
timing and magnitude of software license revenues related to the HIS businesses
and revenue variability in both remote-access computer processing and automated
mailing services.
REVENUES
Total revenues increased $191.8 million and $137.7 million in 1997 and 1996,
respectively. Excluding acquired businesses, total revenues increased
approximately 13% and 10% in 1997 and 1996, respectively. Recurring revenues
derived from remote processing, disaster recovery, and software maintenance and
rentals are approximately $629.5 million, $516.5 million and $425.6 million in
1997, 1996 and 1995, respectively, representing 73%, 77% and 80% of consolidated
revenues, respectively, for those years. The declining percentage of recurring
revenues for the three
years 1995 through 1997 is due primarily to an increase in the percentage of
professional services and third-party equipment revenues to total revenues,
which increased to 13% in 1997, compared to 9% in 1996 and 8% in 1995. The
portion of the increase attributable to professional services is related largely
to conversion and implementation work for a large mutual fund shareholder
accounting installation. The increase in third-party equipment revenues is
largely a result of recent acquisitions, including the 1996 acquisition of NCS.
Software license revenues were $119.2 million, $93.0 million and $64.1
million in 1997, 1996 and 1995, respectively, representing 14% of total revenues
in 1997 and 1996 and 12% in 1995. As a result of the acquisition of Infinity,
the Company expects software license revenues to increase as a percentage of
total revenues.
The Company sells a significant portion of its products and services to the
financial services industry and could be directly affected 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.
Investment Support Systems
ISS revenues increased $153.8 million, or 37%, and $81.7 million, or 25%, in
1997 and 1996, respectively. The respective increases in revenues during 1997
and 1996 are attributable to increases in data processing, software maintenance
and software rental revenues of $77.2 million and $42.4 million and increases in
software license, professional services and equipment revenues of $76.6 million
and $39.3 million. Excluding acquired businesses, revenues increased
approximately 14% and 7% in 1997 and 1996, respectively.
Disaster Recovery Services
DRS revenues increased $34.4 million, or 18%, and $31.5 million, or 19%, in 1997
and 1996, respectively. Excluding acquired businesses, revenues increased
approximately 14% and 15% in 1997 and 1996, respectively. The increases are
attributable primarily to increases in revenues resulting from new contract
signings and contract renewals and to continued growth in midrange and
open-systems platforms.
Computer Services and Other
CS revenues increased $3.6 million, or 6%, and $24.5 million, or 62%, in 1997
and 1996, respectively. Excluding acquired businesses, 1997 and 1996 revenues
increased approximately 3% and 10%, respectively. The 1997 increase is due to an
increase in the Company's remote-access computer processing business. The
increase is net of a decline in revenues in the Company's HIS businesses that is
due primarily to the timing and magnitude of software license revenues. The 1996
increase is due to increased volume in the Company's remote-access computer
services business and, to a lesser extent, increased revenues in the Company's
HIS and mailing services businesses.
COSTS AND EXPENSES
Cost of sales and direct operating expenses increased $73.8 million and $57.6
million in 1997 and 1996, respectively. The increases are due primarily to
acquired businesses and computer and facilities improvements. The percentage of
cost of sales and direct operating expenses to total revenues decreased to 42%
in 1997, from 43% in 1996 and 44% in 1995. The decrease is due primarily to an
increase in higher-margin software license revenues and cost reductions in
certain ISS and HIS businesses.
Sales, marketing and administration expenses increased $41.2 million and
$26.2 million in 1997 and 1996, respectively. The increases are due primarily to
acquired businesses, a DRS sales force expansion and increased commissions
associated with the increase in ISS software license fees.
Product development expenses increased $17.0 million and $11.1 million in
1997 and 1996, respectively. The increases are due primarily to acquired
businesses and increased development spending in connection with various ISS
products. Development costs capitalized were $1.3 million and $3.6 million in
1997 and 1996, respectively.
Depreciation of property and equipment increased $11.4 million and $6.5
million in 1997 and 1996, respectively. The increases are due primarily to
purchases of computer and telecommunications equipment and acquired businesses.
Amortization of intangible assets increased $12.5 million and $9.7 million in
1997 and 1996, respectively, due to acquired businesses.
32.) 33 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS CONTINUED
As explained above, purchased in-process research and development and other
costs of $12.8 million ($0.10 per diluted share), $51.1 million ($0.39 per
diluted share) and $4.2 million ($0.05 per diluted share) were incurred in 1997,
1996 and 1995, respectively. (See Notes 1 and 2 of Notes to Consolidated
Financial Statements).
Net interest decreased $4.1 million and $1.3 million in 1997 and 1996,
respectively. The declines are both due to lower cash and short-term investment
balances and higher borrowings under the Company's line of credit. By the end of
1997, the Company had fully paid its balance under the line of credit, and cash
balances had increased to $64.9 million.
The Company's effective income tax rate was 42.0%, 45.1% and 42.8% in 1997,
1996 and 1995, respectively. The decrease in the rate from 1996 to 1997 is due
to a significantly higher amount of nondeductible costs associated with a
portion of purchased in-process research and development and other costs
incurred in 1996 than the amount of nondeductible merger costs incurred in 1997.
Excluding these nondeductible costs, the Company's 1997, 1996 and 1995 effective
income tax rates were 40.9%, 40.4% and 40.8%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash and short-term investments as of December 31, 1997 increased $18.9 million
from December 31, 1996, to $64.9 million. An increase in accounts receivable and
other current assets as of December 31, 1997 is due primarily to an increase in
software license sales in December 1997 and to acquired businesses.
At December 31, 1997, the Company's remaining commitments consist primarily
of operating leases for computer equipment and facilities aggregating $184.3
million, of which $63.6 million will be paid in 1998. The Company expects that
its existing cash resources (including $41.2 million of cash and short-term
investments held by Infinity at December 31, 1997) and cash generated from
operations will be sufficient for the foreseeable future 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.
YEAR 2000 SYSTEMS EVALUATION
The Company has initiated a comprehensive program to evaluate and address the
impact of the year 2000 on its software systems, computer processing and
disaster recovery operations. This program includes steps to identify each item
or element that will require modification and to establish a plan to complete
and test all required modifications. The assessment, identification and planning
phases are substantially completed. Modification and testing of many of the
Company's software products are completed and substantially all of the remaining
modification and testing activity is expected to be completed during 1998. The
Company is continuing to evaluate its third-party hardware and software systems,
many of which are an integral part of its operations. For these systems, the
Company is relying upon its outside vendors to meet year 2000 requirements.
The Company believes that it will meet its year 2000 commitments using
existing product development and support resources, without incurring
significant incremental expense. To the extent additional modifications and
enhancements become necessary for software products for which modification and
testing for the year 2000 have not been completed, the Company may have to seek
additional staffing resources. Also, certain third-party hardware and operating
system software upgrades may be accelerated in order to meet the Company's year
2000 requirements.
The Company is closely monitoring the progress of each of its businesses to
prepare its systems and operations for the year 2000 and beyond. The Company
expects to meet year 2000 operation commitments and expects to complete this
effort on a timely basis, without significant disruption to its customers or
operations.
The Company believes that year 2000 issues may cause both an acceleration of
software buying decisions and a shortage in the availability of experienced
programmers during the next several years. While the Company cannot predict the
impact of these factors on its business, it does not currently believe that any
such impact will be material.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS) 1997 1996 1995
---------------------------------------------
REVENUES $ 862,151 $ 670,309 $ 532,628
---------------------------------------------
COSTS AND EXPENSES:
COST OF SALES AND DIRECT OPERATING 365,352 291,580 234,011
SALES, MARKETING AND ADMINISTRATION 176,634 135,403 109,226
PRODUCT DEVELOPMENT 78,549 61,474 50,338
DEPRECIATION OF PROPERTY AND EQUIPMENT 48,661 37,356 30,807
AMORTIZATION OF INTANGIBLE ASSETS 46,102 33,627 23,932
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
AND OTHER COSTS 12,808 51,083 4,238
---------------------------------------------
728,106 610,523 452,552
---------------------------------------------
INCOME FROM OPERATIONS 134,045 59,786 80,076
INTEREST INCOME 2,243 5,007 6,054
INTEREST EXPENSE (2,584) (1,224) (1,018)
---------------------------------------------
INCOME BEFORE INCOME TAXES 133,704 63,569 85,112
INCOME TAXES 56,158 28,668 36,440
---------------------------------------------
NET INCOME $ 77,546 $ 34,901 $ 48,672
---------------------------------------------
BASIC NET INCOME PER COMMON SHARE $ 0.89 $ 0.41 $ 0.63
---------------------------------------------
SHARES USED TO COMPUTE BASIC NET INCOME
PER COMMON SHARE 86,819 84,176 77,624
---------------------------------------------
DILUTED NET INCOME PER COMMON SHARE $ 0.87 $ 0.41 $ 0.61
---------------------------------------------
SHARES USED TO COMPUTE DILUTED NET INCOME
PER COMMON SHARE 89,335 86,122 79,336
---------------------------------------------
The accompanying notes are an integral part of these financial statements.
34.) 35 CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS) 1997 1996
-----------------------------
Assets
CURRENT:
CASH AND EQUIVALENTS $ 64,938 $ 46,072
TRADE RECEIVABLES, LESS ALLOWANCE FOR DOUBTFUL
ACCOUNTS OF $17,895 AND $10,391 166,204 130,404
EARNED BUT UNBILLED RECEIVABLES 36,578 27,842
PREPAID EXPENSES AND OTHER CURRENT ASSETS 22,731 18,507
DEFERRED INCOME TAXES 19,628 13,632
-----------------------------
TOTAL CURRENT ASSETS 310,079 236,457
PROPERTY AND EQUIPMENT, LESS ACCUMULATED
DEPRECIATION OF $199,589 AND $158,214 119,996 109,523
SOFTWARE PRODUCTS, LESS ACCUMULATED
AMORTIZATION OF $88,489 AND $68,780 75,129 71,917
GOODWILL, LESS ACCUMULATED AMORTIZATION OF $32,660 AND $23,444 160,109 156,796
OTHER INTANGIBLE ASSETS, LESS ACCUMULATED
AMORTIZATION OF $45,451 AND $34,590 121,021 104,625
-----------------------------
$ 786,334 $ 679,318
-----------------------------
Liabilities and Stockholders' Equity
CURRENT:
SHORT-TERM AND CURRENT PORTION OF LONG-TERM DEBT $ 16,664 $ 34,932
ACCOUNTS PAYABLE 15,063 13,531
ACCRUED COMPENSATION AND BENEFITS 53,693 41,581
OTHER ACCRUED EXPENSES 29,193 24,004
ACCRUED INCOME TAXES 6,534 5,873
DEFERRED REVENUES 103,376 90,345
-----------------------------
TOTAL CURRENT LIABILITIES 224,523 210,266
-----------------------------
LONG-TERM DEBT 2,765 4,414
-----------------------------
COMMITMENTS
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, PAR VALUE $.01 PER SHARE; 5,000 SHARES AUTHORIZED -- --
COMMON STOCK, PAR VALUE $.01 PER SHARE; 120,000 SHARES AUTHORIZED;
88,862 AND 42,300 SHARES ISSUED 889 423
CAPITAL IN EXCESS OF PAR VALUE 192,525 175,937
NOTES RECEIVABLE FOR COMMON STOCK (80) (559)
RESTRICTED STOCK PLANS (1,180) (1,535)
RETAINED EARNINGS 373,543 292,113
FOREIGN CURRENCY TRANSLATION ADJUSTMENT (6,651) (266)
-----------------------------
559,046 466,113
TREASURY STOCK, AT COST, 0 AND 43 SHARES -- (1,475)
-----------------------------
TOTAL STOCKHOLDERS' EQUITY 559,046 464,638
-----------------------------
$ 786,334 $ 679,318
-----------------------------
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
(IN THOUSANDS) 1997 1996 1995
--------------------------------------------
Cash Flow From Operations
NET INCOME $ 77,546 $ 34,901 $ 48,672
RECONCILIATION OF NET INCOME TO CASH FLOW FROM OPERATIONS:
DEPRECIATION AND AMORTIZATION 94,763 70,983 54,739
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
AND OTHER COSTS 9,300 51,083 --
OTHER NONCASH CHARGES 8,339 2,529 1,886
DEFERRED INCOME TAX BENEFIT (14,519) (21,921) (1,374)
--------------------------------------------
175,429 137,575 103,923
CASH PROVIDED BY (USED FOR) WORKING CAPITAL, NET OF EFFECT
OF ACQUIRED BUSINESSES:
ACCOUNTS RECEIVABLE AND OTHER CURRENT ASSETS (34,453) (9,669) (30,650)
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 9,970 863 9,729
DEFERRED REVENUES 602 5,396 7,007
--------------------------------------------
CASH FLOW FROM OPERATIONS 151,548 134,165 90,009
--------------------------------------------
Financing Activities
CASH RECEIVED UNDER EMPLOYEE STOCK PLANS 10,441 12,246 5,999
CASH PAID FOR TREASURY STOCK (140) (4,221) (10,029)
BORROWINGS UNDER LINE OF CREDIT 168,122 18,000 --
REPAYMENTS OF DEBT (194,325) (9,274) (8,594)
--------------------------------------------
TOTAL FINANCING ACTIVITIES (15,902) 16,751 (12,624)
--------------------------------------------
Long-Term Investment Activities
CASH PAID FOR ACQUIRED BUSINESSES, NET OF CASH ACQUIRED (54,069) (165,682) (27,294)
CASH PAID FOR PROPERTY AND EQUIPMENT (54,428) (41,347) (31,652)
CASH PAID FOR SOFTWARE AND OTHER ASSETS (8,283) (12,972) (5,879)
--------------------------------------------
TOTAL LONG-TERM INVESTMENT ACTIVITIES (116,780) (220,001) (64,825)
--------------------------------------------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS
BEFORE SHORT-TERM INVESTMENT ACTIVITIES 18,866 (69,085) 12,560
Short-Term Investment Activities
PURCHASE OF SHORT-TERM INVESTMENTS -- (2,660) (56,188)
MATURITIES OF SHORT-TERM INVESTMENTS -- 38,726 54,228
--------------------------------------------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 18,866 (33,019) 10,600
BEGINNING CASH AND EQUIVALENTS 46,072 79,091 68,491
--------------------------------------------
ENDING CASH AND EQUIVALENTS $ 64,938 $ 46,072 $ 79,091
--------------------------------------------
Supplemental Information
INTEREST PAID $ 2,591 $ 1,213 $ 919
--------------------------------------------
INCOME TAXES PAID $ 66,689 $ 50,140 $ 33,556
--------------------------------------------
ACQUIRED BUSINESSES:
PROPERTY AND EQUIPMENT $ 5,681 $ 11,690 $ 4,719
SOFTWARE PRODUCTS 17,396 42,110 14,597
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT 9,300 44,451 --
GOODWILL AND OTHER INTANGIBLE ASSETS 33,735 98,320 31,933
DEFERRED INCOME TAXES 1,738 9,447 379
PURCHASE PRICE OBLIGATIONS AND DEBT ASSUMED (6,406) (20,217) (7,796)
NET CURRENT LIABILITIES ASSUMED (954) (20,119) (1,117)
COMMON STOCK ISSUED (6,421) -- (15,421)
--------------------------------------------
CASH PAID FOR ACQUIRED BUSINESSES, NET OF
CASH ACQUIRED OF $4,606, $132 AND $8,077 IN
1997, 1996 AND 1995, RESPECTIVELY $ 54,069 $ 165,682 $ 27,294
--------------------------------------------
The accompanying notes are an integral part of these financial statements.
36.) 37 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
COMMON STOCK CAPITAL IN
NUMBER OF PAR EXCESS OF
(IN THOUSANDS) SHARES VALUE PAR VALUE
----------------------------------------------
BALANCES, DECEMBER 31, 1994 18,898 $ 189 $ 162,235
POOLINGS OF INTERESTS 4,253 43 8,878
NET INCOME -- -- --
TWO-FOR-ONE COMMON STOCK SPLIT 18,898 189 (189)
PURCHASE OF COMMON STOCK -- -- --
NOTE REPAYMENTS -- -- --
SHARES ISSUED UNDER STOCK PLANS 62 -- 84
COMPENSATION EXPENSE RELATED TO RESTRICTED STOCK PLANS -- -- --
INCOME TAX BENEFIT ARISING FROM EMPLOYEE STOCK OPTIONS -- -- 550
FOREIGN CURRENCY TRANSLATION ADJUSTMENT -- -- --
----------------------------------------------
BALANCES, DECEMBER 31, 1995 42,111 421 171,558
NET INCOME -- -- --
PURCHASE OF COMMON STOCK -- -- --
NOTE REPAYMENTS -- -- --
SHARES ISSUED UNDER RESTRICTED STOCK PLANS 50 -- 1,687
SHARES ISSUED UNDER STOCK PLANS 139 2 1,520
COMPENSATION EXPENSE RELATED TO RESTRICTED STOCK PLANS -- -- --
INCOME TAX BENEFIT ARISING FROM EMPLOYEE STOCK OPTIONS -- -- 1,172
FOREIGN CURRENCY TRANSLATION ADJUSTMENT -- -- --
----------------------------------------------
BALANCES, DECEMBER 31, 1996 42,300 423 175,937
POOLINGS OF INTERESTS 2,796 28 2,574
NET INCOME -- -- --
TWO-FOR-ONE COMMON STOCK SPLIT 43,353 433 (433)
PURCHASE OF COMMON STOCK -- -- --
NOTE REPAYMENTS -- -- --
SHARES ISSUED UNDER STOCK PLANS 413 5 8,624
COMPENSATION EXPENSE RELATED TO RESTRICTED STOCK PLANS -- -- --
OPTIONS EARNED UNDER LONG-TERM INCENTIVE PLAN -- -- 4,230
INCOME TAX BENEFIT ARISING FROM EMPLOYEE STOCK OPTIONS -- -- 1,593
FOREIGN CURRENCY TRANSLATION ADJUSTMENT -- -- --
----------------------------------------------
BALANCES, DECEMBER 31, 1997 88,862 $ 889 $ 192,525
----------------------------------------------
The accompanying notes are an integral part of these financial statements.
FOREIGN
NOTES RESTRICTED CURRENCY
RECEIVABLE FOR STOCK RETAINED TRANSLATION
(IN THOUSANDS) COMMON STOCK PLANS EARNINGS ADJUSTMENT
-----------------------------------------------------------
BALANCES, DECEMBER 31, 1994 $ -- $ (858) $ 205,121 $ (2,366)
POOLINGS OF INTERESTS (3,332) -- 9,800 32
NET INCOME -- -- 48,672 --
TWO-FOR-ONE COMMON STOCK SPLIT -- -- -- --
PURCHASE OF COMMON STOCK -- -- -- --
NOTE REPAYMENTS 515 -- -- --
SHARES ISSUED UNDER STOCK PLANS -- -- (3,421) --
COMPENSATION EXPENSE RELATED TO RESTRICTED STOCK PLANS -- 638 -- --
INCOME TAX BENEFIT ARISING FROM EMPLOYEE STOCK OPTIONS -- -- -- --
FOREIGN CURRENCY TRANSLATION ADJUSTMENT -- -- -- 1,055
-----------------------------------------------------------
BALANCES, DECEMBER 31, 1995 (2,817) (220) 260,172 (1,279)
NET INCOME -- -- 34,901 --
PURCHASE OF COMMON STOCK -- -- -- --
NOTE REPAYMENTS 2,258 -- -- --
SHARES ISSUED UNDER RESTRICTED STOCK PLANS -- (1,687) -- --
SHARES ISSUED UNDER STOCK PLANS -- -- (2,960) --
COMPENSATION EXPENSE RELATED TO RESTRICTED STOCK PLANS -- 372 -- --
INCOME TAX BENEFIT ARISING FROM EMPLOYEE STOCK OPTIONS -- -- -- --
FOREIGN CURRENCY TRANSLATION ADJUSTMENT -- -- -- 1,013
-----------------------------------------------------------
BALANCES, DECEMBER 31, 1996 (559) (1,535) 292,113 (266)
POOLINGS OF INTERESTS -- -- 3,884 (65)
NET INCOME -- -- 77,546 --
TWO-FOR-ONE COMMON STOCK SPLIT -- -- -- --
PURCHASE OF COMMON STOCK -- -- -- --
NOTE REPAYMENTS 479 -- -- --
SHARES ISSUED UNDER STOCK PLANS -- -- -- --
COMPENSATION EXPENSE RELATED TO RESTRICTED STOCK PLANS -- 355 -- --
OPTIONS EARNED UNDER LONG-TERM INCENTIVE PLAN -- -- -- --
INCOME TAX BENEFIT ARISING FROM EMPLOYEE STOCK OPTIONS -- -- -- --
FOREIGN CURRENCY TRANSLATION ADJUSTMENT -- -- -- (6,320)
-----------------------------------------------------------
BALANCES, DECEMBER 31, 1997 $ (80) $ (1,180) $ 373,543 $ (6,651)
-----------------------------------------------------------
TREASURY STOCK
NUMBER OF
SHARES COST TOTAL
-------------------------------------
BALANCES, DECEMBER 31, 1994 (131) $ (5,029) $ 359,292
POOLINGS OF INTERESTS -- -- 15,421
NET INCOME -- -- 48,672
TWO-FOR-ONE COMMON STOCK SPLIT (91) -- --
PURCHASE OF COMMON STOCK (400) (10,029) (10,029)
NOTE REPAYMENTS -- -- 515
SHARES ISSUED UNDER STOCK PLANS 433 9,515 6,178
COMPENSATION EXPENSE RELATED TO RESTRICTED STOCK PLANS -- -- 638
INCOME TAX BENEFIT ARISING FROM EMPLOYEE STOCK OPTIONS -- -- 550
FOREIGN CURRENCY TRANSLATION ADJUSTMENT -- -- 1,055
-------------------------------------
BALANCES, DECEMBER 31, 1995 (189) (5,543) 422,292
NET INCOME -- -- 34,901
PURCHASE OF COMMON STOCK (131) (4,221) (4,221)
NOTE REPAYMENTS -- -- 2,258
SHARES ISSUED UNDER RESTRICTED STOCK PLANS -- -- --
SHARES ISSUED UNDER STOCK PLANS 277 8,289 6,851
COMPENSATION EXPENSE RELATED TO RESTRICTED STOCK PLANS -- -- 372
INCOME TAX BENEFIT ARISING FROM EMPLOYEE STOCK OPTIONS -- -- 1,172
FOREIGN CURRENCY TRANSLATION ADJUSTMENT -- -- 1,013
-------------------------------------
BALANCES, DECEMBER 31, 1996 (43) (1,475) 464,638
POOLINGS OF INTERESTS -- -- 6,421
NET INCOME -- -- 77,546
TWO-FOR-ONE COMMON STOCK SPLIT (11) -- --
PURCHASE OF COMMON STOCK (17) (140) (140)
NOTE REPAYMENTS -- -- 479
SHARES ISSUED UNDER STOCK PLANS 71 1,615 10,244
COMPENSATION EXPENSE RELATED TO RESTRICTED STOCK PLANS -- -- 355
OPTIONS EARNED UNDER LONG-TERM INCENTIVE PLAN -- -- 4,230
INCOME TAX BENEFIT ARISING FROM EMPLOYEE STOCK OPTIONS -- -- 1,593
FOREIGN CURRENCY TRANSLATION ADJUSTMENT -- -- (6,320)
-------------------------------------
BALANCES, DECEMBER 31, 1997 -- $ -- $ 559,046
-------------------------------------
The accompanying notes are an integral part of these financial statements.
38.)39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
SunGard Data Systems Inc. (the Company), through its wholly owned
subsidiaries, operates in a single industry segment, principally in the
United States, providing computer services, principally proprietary
processing services and software to the financial services industry,
computer disaster recovery services and healthcare information systems.
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany transactions
and accounts have been eliminated.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Future events could cause actual results to
differ from those estimates.
The Company amortizes intangible assets, including software product
costs, over periods that it believes approximate the related useful
lives of those assets based upon estimated future operating results and
cash flows of the underlying business operations. The Company closely
monitors estimates of those lives. Those estimates could change due to
numerous factors, including product demand, market conditions,
technological developments, economic conditions and competitor
activities.
Revenue Recognition
Revenues from remote processing, disaster recovery and software
maintenance services are recognized over the terms of the related
contracts or as the related service is provided. License-fee revenues
from proprietary products are generally recognized upon the signing of a
contract and delivery of the product, except in those instances where
the Company provides training, installation and other significant
postdelivery services. In those instances, a portion of the contract
price is deferred and recognized as the related services are provided.
License-fee revenues from proprietary products that are paid for over
an extended period of time and are bundled together with computer
equipment and other postdelivery services, and for which significant
credit, technology or service risks exist, are recorded ratably over the
contract period. Revenues from fixed-fee contracts requiring a
significant amount of program modification or customization,
installation, systems integration and/or related services are recognized
based upon the estimated percentage of completion. Changes in estimated
costs during the course of a contract are reflected in the period in
which the facts become known.
Cash Equivalents and Short-Term Investments
Cash in excess of daily requirements is invested primarily in
institutional money-market funds, commercial paper, time deposits,
certificates of deposit and short-term bonds. Investments purchased with
a maturity of three months or less at the date of purchase are
considered to be cash equivalents; those with maturities greater than
three months are considered to be short-term investments.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist of temporary cash and short-term
investments and receivables. By policy, the Company places its temporary
cash and short-term investments with institutions of high credit-quality
and limits the amount of credit exposure to any one issuer. 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 believes that any credit
risk associated with receivables is substantially mitigated by a
relatively large number of customer accounts and reasonably short
collection terms. Receivables are stated at estimated net realizable
value, which approximates fair value.
Property and Equipment
Property and equipment are recorded at cost, and depreciation is
provided on the straight-line method over the estimated useful lives of
the related assets (two to eight years for equipment and ten to forty
years for buildings and improvements). Leasehold improvements are
amortized ratably over their remaining lease term or useful life, if
shorter.
Foreign Currency Translation
The functional currency of each of the Company's foreign operations is
the local currency of the country in which the operation is
headquartered. Accordingly, all assets and liabilities are translated
into U.S. dollars using exchange rates in effect at the balance sheet
date. Revenues and expenses are translated using average exchange rates
during the period. Increases and decreases in net assets resulting from
foreign currency translation are accumulated as a separate component of
stockholders' equity.
Software Development and Product Costs
Product development costs are expensed as incurred and consist primarily
of design and development costs of new products and significant
enhancements incurred prior to the establishment of technological
feasibility.
Costs associated with purchased software, software obtained through
business acquisitions, and new products and enhancements to existing
products that meet technological feasibility and recoverability tests
are capitalized and amortized over the estimated useful lives of the
related products, generally five to ten years, using the straight-line
method or the ratio of current revenues to current and anticipated
revenues from such software, whichever provides the greater
amortization. Amortization of all software products aggregated
$20,093,000, $15,358,000 and $9,601,000 during 1997, 1996 and 1995,
respectively.
Goodwill
Goodwill represents the excess of cost over the fair value of net assets
acquired and is amortized using the straight-line method over periods
ranging from twelve to forty years. The recoverability of goodwill is
periodically reviewed by the Company. In assessing recoverability, many
factors are considered, including operating results and cash flows of
the acquired businesses, as well as benefits that the acquired
businesses contribute to existing and related products, services and
markets. After consideration of these factors, the Company determines
whether a reduction in amortizable life or charge for impairment is
appropriate.
In 1997 and 1996, the Company reduced the remaining amortizable life
of goodwill for two acquisitions. Additionally in 1997, the Company
wrote off the remaining $1,467,000 of goodwill associated with the
acquisition of an Australian investment support systems business that
provides investment accounting software and processing services. In
1996, the Company wrote off the remaining $5,157,000 of goodwill
associated with a business that was acquired more than ten years ago.
The Company believes that no further impairment of goodwill existed at
December 31, 1997.
Other Intangible Assets
Other intangible assets consist primarily of contract rights, customer
bases and noncompetition agreements obtained in business acquisitions.
Contract rights and customer bases are amortized using the straight-line
method over their estimated useful lives, ranging from five to thirty
years. Noncompetition agreements are amortized using the straight-line
method over the term of such agreements, ranging from three to seven
years.
Income Taxes
The Company recognizes deferred tax assets and liabilities based upon
the expected future tax consequences of events that have been included
in the financial statements or tax returns. Deferred tax assets and
liabilities are calculated based on the difference between the financial
and tax bases of assets and liabilities using the currently enacted tax
rates in effect during the years in which the differences are expected
to reverse.
2. ACQUISITIONS AND SUBSEQUENT EVENT
Purchase Transactions
During 1997, the Company completed five business acquisitions accounted
for as purchase transactions. Three acquisitions were in the Company's
investment support systems business and two were in its disaster
recovery services business.
Total cash paid in connection with these acquisitions was
$57,457,000, subject to certain adjustments. Goodwill recorded in
connection with these acquisitions was approximately $13,724,000. In
addition, contingent payments of up to $4,147,000 may be paid in
connection with two acquisitions, depending upon the achievement of
certain future financial results.
Also during 1997, the Company paid $727,000 as the contingent portion
of the purchase price related to a business acquired in 1996.
During 1996, the Company completed eight business acquisitions
accounted for as purchase transactions. Five acquisitions were in the
Company's investment support systems business and three were in its
disaster recovery services business.
Total cash paid in connection with the 1996 acquisitions was
$158,807,000, subject to certain adjustments. Goodwill recorded in
connection with these acquisitions was approximately $42,681,000. In
addition, a contingent payment of up to $6,856,000 (including 7,500,000
Australian dollars) may be paid in connection with two of these
acquisitions, depending upon the achievement of certain future financial
results.
During 1997 and 1996, the Company recorded charges of $9,300,000 and
$44,451,000 ($0.06 and $0.32 per diluted share), respectively, for
purchased in-process research and development primarily associated with
the acquisitions of certain assets of Premier Solutions Ltd. (Premier)
in 1997 and of NCS Financial Systems, Inc. (NCS) in 1996. These charges
represent, as of the date of each acquisition, the value of software
products still in development, but not considered to have reached
technological feasibility or to have any alternative future use.
In connection with the acquisitions of Premier and NCS, the Company
engaged a nationally recognized, independent appraisal firm to express
an opinion on the fair market value of the assets acquired to serve as
the basis of allocation of the purchase price to the various classes of
assets acquired.
40.) 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
Also during 1996, the Company paid an additional 50,000,000 Swedish
Kronor (approximately $7,452,000) as the contingent portion of the
purchase price related to a 1992 acquisition. Goodwill was increased by
the amount of that payment.
During 1995, the Company completed six business acquisitions
accounted for as purchase transactions. Four acquisitions were in the
Company's investment support systems business and two were in its
disaster recovery services business.
Total cash paid in connection with the 1995 acquisitions was
approximately $23,962,000, subject to certain adjustments. Goodwill
recorded in connection with these acquisitions was approximately
$13,838,000. In addition, contingent payments of up to $10,500,000 may
be paid in connection with two of these acquisitions, depending upon the
achievement of certain future financial results.
Also during 1995, the Company paid $11,179,000 as the contingent
portion of the purchase price in connection with a 1992 acquisition.
Goodwill was increased by the amount of that payment.
The results of operations of these acquired businesses have been
included in the accompanying Consolidated Statements of Income from the
date of acquisition. Pro forma combined results of operations are not
presented since the results of operations as reported in the
accompanying Consolidated Statements of Income would not be materially
different.
Pooling-of-Interests Transactions
During 1997, the Company issued a total of 3,682,000 shares of common
stock (adjusted for a September 1997 two-for-one stock split) in
connection with six business combinations accounted for as a pooling of
interests. Five of the business combinations were in the Company's
investment support systems business and one was in the Company's
healthcare information systems business.
During 1995, the Company issued a total of 8,506,000 shares of common
stock (adjusted for the September 1997 two-for-one stock split) in
connection with three business combinations accounted for as a pooling
of interests. Two of the combinations form the nucleus of the Company's
healthcare information systems business. The remaining combination was
in the Company's investment support systems business.
During 1997 and 1995, the Company recorded merger costs of $3,508,000
and $4,238,000 ($0.04 and $0.05 per diluted share), respectively, in
connection with these transactions. These costs consist primarily of
investment banking, legal and accounting fees that generally are not
deductible for income tax purposes.
The consolidated results of operations for the years ended December
31, 1997 and 1995 include the operations of each of these businesses
from the beginning of the quarter in which the business combination was
completed. The consolidated financial statements for prior periods have
not been restated since the impact of such restatement would not be
material.
Subsequent Event
On January 2, 1998, the Company issued a total of 13,223,000 shares of
common stock in connection with a business combination with Infinity
Financial Technology, Inc. (Infinity). Infinity develops, markets and
supports enterprise software solutions for financial trading and risk
management. The transaction will be accounted for as a pooling of
interests, which requires all historical financial information to be
restated.
The following pro forma combined results of operations (in thousands,
except for per-share amounts) is provided for illustrative purposes only
and assumes that the merger with Infinity had occurred as of the
beginning of each of the periods presented. The following pro forma
information should not be relied upon as necessarily being indicative of
the historical results that would have been obtained if the companies
had actually been combined during those periods or the results that may
be obtained in the future.
1997 1996 1995
------------------------------------------------------------------------
REVENUES $925,029 $711,857 $557,366
NET INCOME 83,975 40,306 50,845
EARNINGS PER SHARE:
BASIC 0.84 0.43 0.59
DILUTED 0.81 0.41 0.55
3. NET INCOME PER COMMON SHARE
Calculation of Basic and Diluted Net
Income per Common Share
The following table sets forth the computation of the number of shares
used in the computation of basic and diluted net income per common share
(in thousands):
1997 1996 1995
------------------------------------------------------------------------
NET INCOME $77,546 $34,901 $48,672
------------------------------------------------------------------------
WEIGHTED-AVERAGE
COMMON SHARES
OUTSTANDING 86,798 84,176 77,624
CONTINGENT SHARES 21 -- --
TOTAL SHARES USED
FOR CALCULATION OF
BASIC NET INCOME
PER COMMON SHARE 86,819 84,176 77,624
EMPLOYEE STOCK OPTIONS 2,461 1,927 1,712
CONTINGENT STOCK
OPTIONS 55 19 --
TOTAL SHARES USED FOR
CALCULATION OF
DILUTED NET INCOME
PER COMMON SHARE 89,335 86,122 79,336
Common Stock Splits
On August 14, 1997 and June 2, 1995, the Company's Board of Directors
authorized two-for-one stock splits of the Company's common stock. The
stock splits were effective for stockholders of record on September 2,
1997 and June 15, 1995, and shares were issued on September 22, 1997 and
July 7, 1995. The number of shares used for purposes of calculating net
income per common share and all per-share data have been adjusted for
all periods presented to reflect both of these stock splits.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31 (in
thousands):
1997 1996
--------------------
COMPUTER AND
TELECOMMUNICATIONS
EQUIPMENT $208,501 $ 166,934
LEASEHOLD IMPROVEMENTS 42,680 38,403
OFFICE FURNITURE
AND EQUIPMENT 38,350 38,292
BUILDINGS AND
IMPROVEMENTS 19,335 18,490
LAND 2,547 2,285
CONSTRUCTION IN PROGRESS 8,172 3,333
--------------------
319,585 267,737
ACCUMULATED DEPRECIATION
AND AMORTIZATION (199,589) (158,214)
--------------------
$119,996 $ 109,523
--------------------
5. LONG-TERM DEBT
Long-term debt consists of the following at December 31
(in thousands):
1997 1996
--------------------
BANK CREDIT AGREEMENT
(5.7% INTEREST RATE) $ -- $ 15,000
OTHER BANK DEBT
(8.0% INTEREST RATE) 10,204 16,813
PURCHASE PRICE OBLIGATIONS
DUE FORMER OWNERS
OF ACQUIRED BUSINESSES 6,523 5,302
OTHER, PRIMARILY CAPITAL
LEASE OBLIGATIONS FOR
COMPUTER EQUIPMENT
AND BUILDINGS 2,702 2,231
--------------------
19,429 39,346
LESS CURRENT MATURITIES (16,664) (34,932)
--------------------
$ 2,765 $ 4,414
--------------------
The Company has an unsecured revolving credit agreement (Credit
Agreement) that provides for up to $150,000,000 of borrowings for a
period ending August 2002, which may be extended for one year, on an
annual basis, at the lender's option. The Company may borrow at LIBOR
plus a margin, depending upon certain financial ratios at the time of
the borrowing, or a base rate, generally the Prime rate, at the
Company's option. In order to remain eligible to borrow under the Credit
Agreement, the Company must, among other requirements, maintain a
defined minimum net worth and fixed-charge coverage ratio and limit its
total debt. There were no borrowings under the Credit Agreement at
December 31, 1997.
Annual maturities of long-term debt during the next five years are as
follows: 1998-$16,664,000; 1999- $1,068,000; 2000-$184,000; 2001-
$101,000; and 2002-$102,000.
6. STOCK OPTION AND AWARD PLANS
Employee Stock Purchase Plans
Under the Company's Employee Stock Purchase Plans, a maximum of
4,400,000 shares of common stock may be issued to substantially all
employees. Eligible employees may purchase a limited number of shares of
common stock each quarter through payroll deductions, at a purchase
price equal to 85% of the closing price of the Company's common stock on
the last business day of each calendar quarter. During 1997, 1996 and
1995, employees purchased 345,000, 304,000 and 312,000 shares,
respectively, at average purchase prices of $20.94, $16.75 and $11.24
per share, respectively. At December 31, 1997, 1,768,000 shares of
common stock were reserved for issuance under these plans.
Equity Incentive Plans
Under the Company's 1994 and 1996 Equity Incentive Plans, awards or
options to purchase up to 5,500,000 shares of common stock may be
granted to key employees of the Company, with an individual limit of
400,000 shares per participant per year under each plan. Options may be
either incentive stock options or nonqualified stock options, and the
option price generally must be at least equal to the fair value of the
Company's common stock on the date of award or grant. Generally, options
are granted for a ten-year term and become fully exercisable one year
from the date of grant, subject to a four- or five-year vesting
schedule.
During 1997, 1996 and 1995, long-term incentive awards (LTIP awards)
were granted for future options of up to an aggregate of 415,000,
588,000 and 176,000 shares, respectively. The actual number of shares
and the exercise price per share are contingent upon achieving certain
cumulative financial results over a three-year period, beginning on
January 1 of the year of each LTIP award. If and when the option shares
are earned, the exercise price per share will be $19.88, $14.27 and
$9.52, respectively, but could be reduced to a minimum of $1.99, $8.24
and $6.04, respectively, if actual operating results during the three-
year period exceed targeted operating results. Compensation expense, if
any, is estimated initially at the
42.) 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
time the achievement of the cumulative financial results becomes
probable and is recorded over the remaining three-year period of each
LTIP award, based upon the difference between the market value and
exercise price of the shares earned. During the years ended December 31,
1997, 1996 and 1995, compensation expense of $5,805,000, $1,875,000 and
$631,000, respectively, was recorded in connection with certain 1996,
1995 and 1994 LTIP awards. No compensation expense has been recorded for
the 1997 LTIP award. During 1997, 102,000 option shares were issued
under the 1994 LTIP award, at exercise prices ranging from $6.18 to
$9.66 per share.
Under the Company's 1986 and 1982 Stock Option Plans, options to
purchase up to 8,188,000 shares of the Company's common stock may be
issued to officers and key employees. These options may be either
incentive stock options or nonqualified stock options, and the option
price must be at least equal to the fair value of the Company's common
stock on the date of grant. Generally, options are granted for a ten-
year term and become fully exercisable one year from the date of grant,
subject to a four- or five-year vesting schedule.
The table on page 43 summarizes transactions under these equity
incentive and stock option plans. All share and per-share amounts have
been restated to reflect the July 1995 and September 1997 two-for-one
stock splits (see Note 3).
At December 31, 1997, 8,434,000 shares of common stock were reserved
for issuance under the Company's equity incentive and stock option
plans.
Restricted Stock Plans
The Company's Restricted Stock Award Plan for Outside Directors (RSAP)
provides for awards of up to 400,000 shares of the Company's common
stock. Each outside director automatically receives an initial award of
20,000 shares of the Company's common stock upon election to the
Company's Board of Directors and, upon re-election as an outside
director every fifth year thereafter, automatically receives another
20,000 shares. Shares awarded under the RSAP are subject to certain
transfer and forfeiture restrictions that lapse over a five-year vesting
period. RSAP awards for 100,000 shares were granted during 1996, at a
market value of $16.87 per share. There were no awards during 1997 or
1995. At December 31, 1997, 142,000 shares of common stock were reserved
for issuance under this plan.
The Company's Restricted Stock Incentive Plan (RSIP) provides for
awards of up to 1,600,000 shares of the Company's common stock to key
management employees. Shares awarded under the RSIP are subject to
certain transfer and forfeiture restrictions that lapse over a five-year
vesting period. There have been no awards granted since 1991. At
December 31, 1997, 214,000 shares of common stock were reserved for
issuance under this plan.
Unearned compensation expense related to the restricted stock plans
is reported as a reduction of stockholders' equity in the accompanying
consolidated financial statements. For accounting purposes, compensation
expense is recorded ratably over the five-year period during which the
shares are subject to transfer and forfeiture restrictions and is based
on the market value on the award date less the par value of the shares
awarded. Compensation expense related to the RSAP and RSIP aggregated
$355,000, $372,000 and $638,000 for the years ended December 31, 1997,
1996 and 1995, respectively.
Pro Forma Information
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," in accounting for its stock option and award plans.
Accordingly, compensation expense has been recorded for its LTIP, RSAP
and RSIP awards, and no expense has been recorded for its other stock-
based plans. FASB Statement No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123), changes the method for recognition of cost on
stock option and award plans. Adoption of the cost-recognition
requirements under SFAS 123 is optional; however, pro forma information
is presented in the following paragraph.
Had compensation cost for the Company's stock option and award plans
been determined based upon the fair value at the date of grant, as
prescribed under SFAS 123, the Company's net income and diluted net
income per share would have been reduced by approximately $2,964,000,
$5,110,000 and $1,185,000 ($0.03, $0.06 and $0.02 per share) in 1997,
1996 and 1995, respectively. The fair value of the options granted
during 1997, 1996 and 1995 is estimated to be $10.84, $8.36 and $6.06
per share, respectively, on the date of grant using the Black-Scholes
pricing model with the following assumptions: volatility of 36% in 1997
and 37% in 1996 and 1995; expected term of six years; risk-free interest
rate of 5.75% in 1997 and 6.5% in 1996 and 1995; and no dividend yield.
The effects of applying SFAS 123 in this pro forma disclosure are not
necessarily indicative of the impact on future years, since SFAS 123
does not apply to grants and awards made prior to 1995 and the Company's
options and awards generally vest over five years. The Company also
anticipates that additional options and awards will be made in future
years.
Shares (in thousands)
------------------------------------- -------------
Under Weighted
Available Under Option LTIP Award Average Price
------------------------------------- -------------
BALANCES AT DECEMBER 31, 1994 2,920 2,604 168 $ 4.18
POOLINGS OF INTERESTS -- 178 -- 2.70
LTIP AWARDS (176) -- 176 --
CANCELED 112 (112) -- 5.38
GRANTED (1,458) 1,458 -- 12.49
EXERCISED -- (678) -- 2.79
-------------------------------------
BALANCES AT DECEMBER 31, 1995 1,398 3,450 344 7.79
AUTHORIZED 3,500 -- -- --
LTIP AWARDS (588) -- 588 --
CANCELED 306 (350) -- 13.28
GRANTED (3,108) 3,108 -- 17.60
EXERCISED -- (526) -- 5.96
-------------------------------------
BALANCES AT DECEMBER 31, 1996 1,508 5,682 932 13.11
POLLINGS OF INTERESTS -- 674 -- 3.90
LTIP AWARDS (415) -- 415 --
LTIP MATURITY 66 102 (168) 7.32
CANCELED 249 (260) (50) 17.63
GRANTED (768) 768 -- 23.05
EXERCISED -- (356) -- 7.67
-------------------------------------
BALANCES AT DECEMBER 31, 1997 640 6,610 1,129 13.35
-------------------------------------
The following table summarizes information concerning outstanding and
exercisable options (in thousands) as of December 31, 1997:
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------- -----------------------------------------
Weighted average
Range of Exercise Remaining Weighted average
Prices Number of Options Life (years) Exercise Price Number of Options Exercise Price
- -------------------------------------------------------------------------- -----------------------------------------
$0.01 to $5.00 1,391 3.4 $ 2.87 1,391 $ 2.87
$5.01 to $10.00 530 6.5 7.79 516 7.78
$10.01 to $15.00 1,491 7.7 12.66 1,474 12.66
$15.01 to $20.00 1,952 8.1 17.12 1,952 17.12
over $20.00 1,246 9.1 22.27 563 20.50
7. SAVINGS PLAN
The Company and its subsidiaries maintain savings plans that cover substantially
all employees. These plans generally provide that the Company will contribute a
certain percentage of employee compensation or contributions up to a specified
level. Company contributions charged to income under these plans aggregated
$8,445,000, $6,125,000 and $5,338,000 for the years ended December 31, 1997,
1996 and 1995, respectively.
8. INCOME TAXES
The provisions for income taxes for the years ended December 31, 1997, 1996 and
1995 consist of the following (in thousands):
1997 1996 1995
--------------------------------
CURRENT
FEDERAL $ 51,761 $37,460 $ 26,112
STATE 12,126 8,973 6,708
FOREIGN 6,790 4,156 4,994
--------------------------------
70,677 50,589 37,814
--------------------------------
DEFERRED
FEDERAL (12,409) (19,639) (1,376)
STATE (1,665) (2,680) (216)
FOREIGN (445) 398 218
--------------------------------
(14,519) (21,921) (1,374)
--------------------------------
$ 56,158 $ 28,668 $ 36,440
--------------------------------
Differences between income tax expense at the United States federal statutory
income tax rate and the Company's effective income tax rate for the years ended
December 31, 1997, 1996 and 1995 are as follows (in thousands):
1997 1996 1995
-------------------------------
TAX AT FEDERAL
STATUTORY RATE $46,796 $22,249 $29,789
STATE INCOME
TAXES, NET OF
FEDERAL BENEFIT 6,216 4,090 4,393
PURCHASED IN-PROGRESS
RESEARCH AND
DEVELOPMENT AND
OTHER COSTS 1,234 2,656 1,524
INTANGIBLE
AMORTIZATION 1,819 1,365 1,039
TAX-EXEMPT INTEREST
INCOME -- (234) (648)
FOREIGN TAXES (512) (444) (120)
OTHER, NET 605 (1,014) 463
-------------------------------
$56,158 $28,668 $36,440
-------------------------------
EFFECTIVE INCOME
TAX RATE 42.0% 45.1% 42.8%
-------------------------------
44.) 45 NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS continued
Deferred income taxes are recorded based upon differences between
financial statement and tax bases of assets and liabilities. The
following deferred income taxes were recorded as of December 31, 1997
and 1996 (in thousands):
1997 1996
----------------------
CURRENT:
ACCOUNTS RECEIVABLE $ 7,004 $ 3,799
ACCRUED COMPENSATION
AND BENEFITS 4,547 5,692
OTHER ACCRUED EXPENSES 2,319 2,554
DEFERRED REVENUES AND
ACQUISITION-RELATED ITEMS 5,758 1,587
----------------------
$ 19,628 $ 13,632
----------------------
LONG-TERM:*
PROPERTY AND EQUIPMENT $ 6,072 $ 1,334
INTANGIBLE ASSETS (606) (9,807)
LONG-TERM INCENTIVE PLAN 2,952 --
PURCHASED IN-PROCESS
RESEARCH AND DEVELOPMENT
AND OTHER ACQUISITION-
RELATED ITEMS 17,854 23,360
----------------------
$ 26,272 $ 14,887
----------------------
* INCLUDED IN OTHER INTANGIBLE ASSETS.
9. EXPORT SALES
The Company's domestic operations recorded revenues, primarily from
international software licenses, maintenance and professional services,
of approximately $94,318,000, $58,019,000 and $51,273,000 for the years
ended December 31, 1997, 1996 and 1995, respectively. During 1997,
export revenues were made to the following regions of the world: Europe-
$63,878,000; Asia Pacific-$21,029,000; Canada and other-$9,411,000.
10. COMMITMENTS
The Company leases a substantial portion of its computer equipment and
facilities under operating leases. Future minimum rentals under
operating leases with initial or remaining noncancelable lease terms in
excess of one year as of December 31, 1997 follow (in thousands):
1998 $ 63,571
1999 49,347
2000 30,188
2001 19,905
2002 9,822
THEREAFTER 11,443
--------
$184,276
--------
Rent expense aggregated $65,535,000, $56,451,000 and $52,359,000 for
the years ended December 31, 1997, 1996 and 1995, respectively.
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Stockholders
SunGard Data Systems Inc.
We have audited the accompanying consolidated balance sheets of SunGard
Data Systems Inc. and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of income, stockholders' equity and
cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the
consolidated financial position of SunGard Data Systems Inc. and
subsidiaries as of December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ Coopers & Lybrand LLP
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 12, 1998