SunGard Data Systems, Inc.--Form 10-Q/A
Table of Contents


United States Securities and Exchange Commission

Washington, D.C. 20549


FORM 10-Q/A


(Amendment No. 1)

(Mark One)

x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2003

OR

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 number 1-12989


SunGard® Data Systems Inc.

(Exact name of registrant as specified in its charter)


 

  Delaware
(State or other jurisdiction of
incorporation or organization)
  51-0267091
(IRS Employer Identification No.)
 
 

680 East Swedesford Road, Wayne, Pennsylvania 19087
(Address of principal executive offices, including zip code)

484-582-2000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes x No o

There were 285,384,707 shares of the registrant’s common stock, par value $.01 per share, outstanding at June 30, 2003.





Table of Contents

EXPLANATORY NOTE

        This amendment to Form 10-Q for the quarterly period ended June 30, 2003, is being filed solely to correct a typographical error, which arose during the EDGAR conversion process, on the Consolidated Balance Sheets appearing under Part I, Item 1, on page 1 of the originally filed report.

        This amendment correctly states the Consolidated Balance Sheets line item “Trade receivables, less allowance for doubtful accounts” as $522,545 (in thousands) for June 30, 2003. For the convenience of the reader, the Quarterly Report in its entirety has been provided herein.

 

SUNGARD DATA SYSTEMS INC.
AND SUBSIDIARIES

INDEX

 

 

 

 

 

 

PAGE

 

 

 

 

 

 

PART I.

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

 

Item 1.

 

Financial Statements:

 

 

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets as of June 30, 2003 (unaudited) and December 31, 2002

1

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Income for the six and three months ended June 30, 2003 and 2002 (unaudited)

2

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2002 (unaudited)

3

 

 

 

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

4

 

 

 

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

10

 

 

 

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

20

 

 

 

 

 

 

 

 

Item 4.

 

Controls and Procedures

21

 

 

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

21

 

 

 

 

 

 

 

 

Item 2.

 

Changes in Securities and Use of Proceeds

21

 

 

 

 

 

 

 

 

Item 3.

 

Defaults upon Senior Securities

21

 

 

 

 

 

 

 

 

Item 4.

 

Submission of Matters to a Vote of Security Holders

21

 

 

 

 

 

 

 

 

Item 5.

 

Other Information

22

 

 

 

 

 

 

 

 

Item 6.

 

Exhibits and Reports on Form 8-K

22


 

 

 

 

SIGNATURES

23



Table of Contents

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

SunGard Data Systems Inc.
Consolidated Balance Sheets
(In thousands, except per-share amounts)

 

 

June 30,
2003
(unaudited)

 

December 31,
2002

 

Assets

 

 

 

 

 

 

Current:

 

 

 

 

 

 

Cash and equivalents

$

379,690

   

$

439,735

 

Trade receivables, less allowance for doubtful accounts of $55,389 and $42,999

 

522,545

   

 

518,390

 

Earned but unbilled receivables

 

54,894

 

 

48,158

 

Prepaid expenses and other current assets

 

95,375

 

 

80,820

 

Clearing broker assets

 

208,963

 

 

 

Deferred income taxes

 

47,175

 

 

47,913

 

Total current assets

 

1,308,642

 

 

1,135,016

 

Property and equipment, less accumulated depreciation of $644,719 and $621,994

 

575,796

 

 

566,199

 

Software products, less accumulated amortization of $300,790 and $271,753

 

212,786

 

 

132,083

 

Customer base, less accumulated amortization of $129,670 and $110,031

 

385,140

 

 

343,973

 

Other tangible and intangible assets, less accumulated amortization of $22,106 and $19,035

 

70,215

 

 

72,707

 

Deferred income taxes

 

41,435

 

 

92,568

 

Goodwill

 

1,230,057

 

 

939,050

 

    3,824,071     3,281,596  

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

Current:

 

 

 

 

 

 

Short-term and current portion of long-term debt

$

18,181

 

$

18,128

 

Accounts payable

 

33,616

 

 

59,946

 

Accrued compensation and benefits

 

124,167

 

 

137,362

 

Other accrued expenses

 

218,445

 

 

203,696

 

Accrued income taxes

 

20,928

 

 

25,290

 

Clearing broker liabilities

 

206,008

 

 

 

Deferred revenues

     475,634        426,811  

Total current liabilities

  1,096,979     871,233  

Long-term debt

  285,257     187,964  

Commitments and contingencies

 

 

 

 

 

 

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; 285,385 and 283,796 shares issued

 

2,854

 

 

2,838

 

Capital in excess of par value

 

828,822

 

 

801,936

 

Restricted stock plans

 

(2,407

)

 

(2,324

)

Retained earnings

 

1,562,596

 

 

1,396,680

 

Accumulated other comprehensive income

 

49,970

 

 

23,965

 

 

 

2,441,835

 

 

2,223,095

 

Treasury stock, at cost, 0 and 58 shares

 

 

 

(696

)

Total stockholders’ equity

  2,441,835     2,222,399  
    3,824,071     3,281,596  

The accompanying notes are an integral part of these financial statements.


1


Table of Contents

SunGard Data Systems Inc.
Consolidated Statements of Income
(In thousands, except per-share amounts)
(Unaudited)

 

 

 

Six Months Ended
June 30,

 

Three Months Ended
June 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Services

 

$

1,285,878

   

$

1,108,729

   

$

665,643

   

$

564,615

 

License and resale fees

 

 

86,348

 

 

94,896

 

 

49,635

 

 

44,771

 

Total products and services

 

 

1,372,226

 

 

1,203,625

 

 

715,278

 

 

609,386

 

Reimbursed expenses

 

 

36,298

 

 

27,926

 

 

18,685

 

 

13,942

 

 

 

 

1,408,524

 

 

1,231,551

 

 

733,963

 

 

623,328

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales and direct operating

 

 

625,187

 

 

521,829

 

 

321,777

 

 

266,613

 

Sales, marketing and administration

 

 

261,332

 

 

245,945

 

 

131,866

 

 

114,924

 

Product development

 

 

91,682

 

 

81,565

 

 

49,636

 

 

39,160

 

Depreciation and amortization

 

 

111,486

 

 

94,872

 

 

55,258

 

 

47,564

 

Amortization of acquisition-related intangible assets

 

 

39,999

 

 

31,738

 

 

22,764

 

 

17,748

 

Merger costs

 

 

1,296

 

 

1,677

 

 

1,296

 

 

 

 

 

 

1,130,982

 

 

977,626

 

 

582,597

 

 

486,009

 

Income from operations

 

 

277,542

 

 

253,925

 

 

151,366

 

 

137,319

 

Interest income

 

 

2,912

 

 

4,717

 

 

1,636

 

 

2,381

 

Interest expense

 

 

(5,301

)

 

(6,979

)

 

(3,533

)

 

(2,826

)

Other income

 

 

 

 

590

 

 

 

 

590

 

Income before income taxes

 

 

275,153

 

 

252,253

 

 

149,469

 

 

137,464

 

Income taxes

 

 

109,234

 

 

100,548

 

 

59,589

 

 

55,780

 

Net income

 

$

165,919

 

$

151,705

 

$

89,880

 

$

81,684

 

Basic net income per common share

 

$

0.58

 

$

0.54

 

$

0.32

 

$

0.29

 

Diluted net income per common share

 

$

0.57

 

$

0.52

 

$

0.31

 

$

0.28

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used to compute net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

284,339

 

 

281,760

 

 

284,744

 

 

282,277

 

Diluted

 

 

289,572

 

 

290,974

 

 

290,786

 

 

290,770

 

The accompanying notes are an integral part of these financial statements.


2


Table of Contents

SunGard Data Systems Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

 

 

 

Six Months Ended
June 30,

 

 

 

2003

 

2002

 

Cash flow from operations:

 

 

 

 

 

 

 

Net income

 

$

165,919

 

$

151,705

 

Reconciliation of net income to cash flow from operations:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

151,485

 

 

126,610

 

Other noncash credits

 

 

(10,456

)

 

(2,823

)

Deferred income tax provision

 

 

9,092

 

 

7,715

 

Accounts receivable and other current assets

 

 

29,195

 

 

95,343

 

Accounts payable and accrued expenses

 

 

(79,816

)

 

(16,615

)

Clearing broker assets and liabilities, net

 

 

(3,029

)

 

 

Deferred revenues

 

 

(184

)

 

(15,165

)

Cash flow from operations

 

 

262,206

 

 

346,770

 

Financing activities:

 

 

 

 

 

 

 

Cash received from stock option and award plans

 

 

23,358

 

 

28,824

 

Cash received from borrowings, net of fees

 

 

140,484

 

 

50,191

 

Cash used to repay debt

 

 

(49,384

)

 

(278,678

)

Total financing activities

 

 

114,458

 

 

(199,663

)

Investment activities:

 

 

 

 

 

 

 

Cash paid for acquired businesses, net of cash acquired

 

 

(328,054

)

 

(25,125

)

Cash paid for property and equipment

 

 

(97,357

)

 

(42,665

)

Cash paid for software and other assets

 

 

(11,298

)

 

(16,329

)

Cash paid for initial 25% interest in Guardian iT plc

 

 

 

 

(20,511

)

Total investment activities

 

 

(436,709

)

 

(104,630

)

Increase (decrease) in cash and equivalents

 

 

(60,045

)

 

42,477

 

Beginning cash and equivalents

 

 

439,735

 

 

396,320

 

Ending cash and equivalents

 

$

379,690

 

$

438,797

 

Supplemental information:

 

 

 

 

 

 

 

Acquired businesses:

 

 

 

 

 

 

 

Property and equipment

 

$

8,492

 

$

(5,310

)

Software products

 

 

95,936

 

 

3,568

 

Purchased in-process research and development

 

 

910

 

 

 

Customer base

 

 

57,206

 

 

4,893

 

Goodwill

 

 

278,764

 

 

17,296

 

Other tangible and intangible assets

 

 

4,498

 

 

5,750

 

Purchase price obligations and debt assumed

 

 

(6,696

)

 

(3,068

)

Net current assets acquired (liabilities assumed)

 

 

(111,056

)

 

1,996

 

Cash paid for acquired businesses, net of cash acquired of $57,874 and $342, respectively

 

$

328,054

 

$

25,125

 

The accompanying notes are an integral part of these financial statements.


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Table of Contents

SUNGARD DATA SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.          Basis of Presentation:

SunGard Data Systems Inc. (the Company) has three segments: Investment Support Systems (ISS), Availability Services (AS) and Other Businesses. The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. All significant intercompany transactions and accounts have been eliminated.

The accompanying interim consolidated financial statements of the Company have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP), consistent in all material respects with those applied in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. Interim financial reporting does not include all of the information and footnotes required by GAAP for complete financial statements. The interim financial information is unaudited, but reflects all normal adjustments that are, in the opinion of management, necessary to provide a fair statement of results for the interim periods presented. Operating results for the six and three month periods ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.

2.          Acquisitions:

The Company seeks to grow through both internal development and the acquisition of businesses that broaden or complement its existing product lines. During the six months ended June 30, 2003, the Company completed five acquisitions in its ISS segment and one acquisition in its Other Businesses segment. Gross cash paid in connection with these acquisitions is $370.9 million, subject to certain adjustments.

During the six months ended June 30, 2002, the Company completed four acquisitions in its ISS segment. Total cash paid in connection with these acquisitions is $25.1 million, subject to certain adjustments. Goodwill recorded for all of these acquisitions is $12.0 million.

In connection with certain previously acquired businesses, a total of up to $205.0 million could be paid as additional consideration over the next three years contingent upon the future operating performance of those businesses. The amount paid, if any, will be recorded as additional goodwill at the time the actual performance is known and the amounts become due. During the six months ended June 30, 2003, the Company paid $15.0 million as additional consideration based upon the operating performance of a business previously acquired.

At June 30, 2003, the purchase-price allocations for four of the six current-year acquisitions are preliminary. These allocations are expected to be finalized in 2003 when independent valuations of the intangible assets acquired and certain lease obligations assumed are completed.


4


Table of Contents

Changes in goodwill by segment during the six months ended June 30, 2003 follow (in thousands):

 

 

 

ISS

 

AS

 

Other
Businesses

 

Total

 

Balances at December 31, 2002

 

$

321,242

 

$

584,985

 

$

32,823

 

$

939,050

 

2003 acquisitions

 

 

186,645

 

 

 

 

75,967

 

 

262,612

 

Adjustments to previous acquisitions

 

 

539

 

 

613

 

 

 

 

1,152

 

Contingent purchase price paid

 

 

15,000

 

 

 

 

 

 

15,000

 

Effect of foreign currency translation

 

 

410

 

 

11,833

 

 

 

 

12,243

 

Balances at June 30, 2003

 

$

523,836

 

$

597,431

 

$

108,790

 

$

1,230,057

 


Primarily due to current-year acquisitions, the estimated amortization expense for each of the years 2003 to 2007 contained in Note 1 to the Company’s Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 has changed. In addition, because certain of these allocations are still preliminary, it is likely that the estimated annual amortization expense will continue to change until the allocations are finalized. Based on amounts recorded at June 30, 2003, total estimated amortization of all acquisition-related intangible assets during each of the years ended December 31 follows (in thousands):

 

2003

 

$83,241

 

2004

 

80,162

 

2005

 

68,662

 

2006

 

61,184

 

2007

 

51,228

 


In connection with the integration of the last two AS acquisitions into the Company’s AS segment, the Company accrued, as a cost of the acquisitions and as part of goodwill, estimated costs of closing certain acquired facilities and reducing acquired headcount. The estimated costs for closing certain of the Company’s existing facilities and headcount reductions related to the Company’s existing employees were included in merger costs. Generally, all equipment located at closed facilities is relocated to other facilities, thereby improving the operational resilience and scope of services available to customers. All severance and facility closure accruals are included in accrued expenses. The changes to these accruals follow (in thousands):

 

 

 

Severance

 

Facilities

 

Total

 

Accrued at December 31, 2002

 

$

2,295

 

$

50,183

 

$

52,478

 

Changes in estimates

 

 

(154

)

 

565

 

 

411

 

Usage

 

 

(967

)

 

(8,131

)

 

(9,098

)

Effect of foreign currency translation

 

 

6

 

 

465

 

 

471

 

Accrued at June 30, 2003

 

$

1,180

 

$

43,082

 

$

44,262

 


The remaining facility closure accrual relates primarily to the remaining lease obligations for 11 facilities, net of estimated sublease income, and will be paid over their remaining lease terms, which expire between 2003 and 2017, unless terminated earlier.


5


Table of Contents

Merger Costs:

During the six months ended June 30, 2003, $1.3 million (less than $0.01 per diluted share) of merger costs were recorded. These costs were related to a charge for in-process research and development, costs related to closing a Company facility, and related severance costs associated with the acquisition of Caminus Corporation (Caminus). During the six months ended June 30, 2002, $1.7 million (less than $0.01 per diluted share) of merger costs were recorded. These costs related to closing certain Company facilities associated with the acquisition of the availability solutions business of Comdisco Inc.

Pro Forma Financial Information:

The Company completed the acquisitions of Assent LLC, a registered clearing broker/dealer, on March 3, 2003, H.T.E., Inc. on March 18, 2003, and Caminus on April 9, 2003. On July 1, 2002, the Company completed the acquisition of Guardian iT plc. The following unaudited pro forma combined results of operations for the six months ended June 30, 2003 and 2002 and for the three months ended June 30, 2002 (in thousands, except per-share amounts) are provided for illustrative purposes only and assume that these acquisitions all occurred on January 1, 2002. Pro forma combined results of operations are not presented for the three months ended June 30, 2003 since the results as reported in the accompanying Consolidated Statements of Income would not be materially different. This unaudited pro forma information should not be relied upon as necessarily being indicative of the historical results that would have been obtained if these acquisitions had actually occurred on that date, nor of the results that may be obtained in the future.

 

 

 

Six Months Ended June 30,

 

Three months
Ended June 30,

 

 

 

2003

 

2002

 

2002

 

Revenues

 

$

1,448,730

 

$

1,420,150

 

 

$  713,530

 

Net income

 

 

149,212

 

 

120,144

 

 

58,142

 

Diluted net income per common share, as reported

 

 

0.57

 

 

0.52

 

 

0.28

 

Pro forma diluted net income per common share

 

 

0.52

 

 

0.41

 

 

0.20

 


Pro forma combined results of operations are not presented for the remaining acquired businesses since the results as reported in the accompanying Consolidated Statements of Income would not be materially different.

3.          Stock-Based Compensation:

The Company applies Accounting Principles Board Opinion Number 25, “Accounting for Stock Issued to Employees,” in accounting for its stock option and award plans. Accordingly, compensation expense has been recorded for its restricted stock awards and no expense has been recorded for its other stock-based plans. Statement of Financial Accounting Standards Number 123, “Accounting for Stock-Based Compensation” (SFAS 123), changed the method for recognition of cost of stock option and award plans. Adoption of the cost recognition requirements under SFAS 123 is optional; however, the following supplemental information is provided for each of the six and three months ended June 30 (in thousands, except per-share amounts):


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Table of Contents

 

 

 

Six Months Ended 
June 30,

 

Three Months Ended 
June 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

Net income, as reported (including stock-based employee compensation costs, net of tax, of $248, $268, $119 and $124, respectively)

 

$

165,919

 

$

151,705

 

$

89,880

 

$

81,684

 

Additional stock-based employee compensation costs under SFAS 123, net of tax

 

 

(32,533

)

 

(27,725

)

 

(18,911

)

 

(16,092

)

Pro forma net income

 

$

133,386

 

$

123,980

 

$

70,969

 

$

65,592

 

Pro forma net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.47

 

$

0.44

 

$

0.25

 

$

0.23

 

Diluted

 

$

0.46

 

$

0.43

 

$

0.24

 

$

0.23

 


The weighted-average fair value of the options granted during the six months ended June 30, 2003 and 2002 and the three months ended June 30, 2003 and 2002 is estimated to be $11.67, $18.58, $12.30 and $15.53 per share, respectively, on the date of grant, representing 58%, 57%, 54% and 53%, respectively, of the weighted-average market value of the Company’s common stock on the date of grant. The fair value of options granted is determined using the Black-Scholes pricing model with the following assumptions:

 

 

 

Six Months Ended 
June 30,

 

Three Months Ended
 June 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

Volatility

 

 

53

%

 

52

%

 

53

%

 

52

%

Risk-free interest rate

 

 

3.10

%

 

3.10

%

 

2.85

%

 

3.10

%

Expected term

 

 

6 years

(1)

 

6 years

(1)

 

6 years

(1)

 

6 years

(1)


(1) Nine and one half years for unvested performance accelerated stock options.

The effects of applying SFAS 123 in this pro forma disclosure are not necessarily indicative of the impact on future years, since the Company anticipates that additional options and awards will be granted in future years.


7


Table of Contents

4.          Clearing Broker Assets and Liabilities:

At June 30, 2003, clearing broker assets and liabilities are comprised of the following (in thousands):

 

Segregated customer cash and treasury bills

 

$

55,853

 

Customer securities

 

 

37,988

 

Securities borrowed

 

 

35,933

 

Receivables from customers and other

 

 

10,157

 

Settlement receivables from brokers/dealers

 

 

69,032

 

Clearing broker assets

 

$

208,963

 

Payables to customers

 

$

67,461

 

Securities loaned

 

 

31,960

 

Customer securities sold short, not yet purchased

 

 

96,430

 

Other

 

 

10,157

 

Clearing broker liabilities

 

$

206,008

 


Segregated customer cash and treasury bills are held by the Company on behalf of customers. Customer securities consist of trading and investment securities at fair market values. Securities borrowed and loaned represent deposits made to or received from other brokers/dealers. Receivables from and payables to customers represent amounts due or payable on cash and margin transactions. Settlement receivables from brokers/dealers and customer securities sold short, not yet purchased represent amounts receivable from or payable to brokers/dealers for unsettled securities transactions.

5.          Shares Used in Computing Net Income Per Common Share:

The computation of shares used in computing basic and diluted net income per common share follows (in thousands):

 

 

 

Six Months Ended
June 30,

 

Three Months Ended
June 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding used for calculation of basic net income per common share

 

284,339

 

281,760

 

284,744

 

282,277

 

Dilutive effect of employee stock options

 

5,233

 

9,214

 

6,042

 

8,493

 

Total shares used for calculation of diluted net income per common share

 

289,572

 

290,974

 

290,786

 

290,770

 


During the six months ended June 30, 2003 and 2002, there were approximately 18.8 million and 4.2 million outstanding employee stock options, respectively, that are out-of-the-money and therefore excluded from the calculation of the dilutive effect of employee stock options, as compared to 18.0 million and 6.5 million outstanding employee stock options during the three months ended June 30, 2003 and 2002, respectively. Stock options are considered to be out-of-the-money when the option exercise price exceeds the average share price during the respective periods and are therefore not dilutive and not included in the calculation of the dilutive effect of stock options.


8


Table of Contents

6.          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 follows (in thousands):

 

 

 

Six Months Ended
June 30,

 

Three Months Ended
June 30,

 

 

 

2003

     

2002

     

2003

     

2002

 

Net income

 

$

165,919

    

$

151,705

    

$

89,879

    

$

81,684

 

Foreign currency translation gains

 

 

26,005

 

 

14,887

 

 

28,953

 

 

17,587

 

Comprehensive income

 

$

191,924

 

$

166,592

 

$

118,832

 

$

99,271

 


7.          Guarantees:

The Company’s customer contracts generally include typical customer indemnification, primarily for intellectual property infringement claims. Liabilities in connection with such obligations have not been material.

8.          Segment Information:

The Company has three segments: ISS, AS and Other Businesses. Effective January 1, 2003, a change in management responsibilities caused a reclassification of a business that provides workflow management systems, primarily to healthcare insurance organizations, from Other Businesses to ISS. This change in segment reporting has been reflected for all periods presented. The operating results for each of the segments follow (in thousands):


9


Table of Contents

 

 

 

Six Months Ended
June 30,

 

Three Months Ended
June 30,

 

 

 

2003

     

2002

     

2003

     

2002

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment support systems

 

$

726,921

    

$

677,602

    

$

383,652

    

$

344,791

 

Availability services

 

 

577,516

 

 

475,540

 

 

290,264

 

 

238,230

 

Other businesses

 

 

67,789

 

 

50,483

 

 

41,362

 

 

26,365

 

Reimbursed expenses

 

 

36,298

 

 

27,926

 

 

18,685

 

 

13,942

 

 

 

$

1,408,524

 

$

1,231,551

 

$

733,963

 

$

623,328

 

Income from operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment support systems

 

$

143,296

 

$

159,864

 

$

76,117

 

$

82,584

 

Availability services

 

 

147,701

 

 

105,643

 

 

81,610

 

 

59,626

 

Other businesses

 

 

9,336

 

 

9,979

 

 

5,714

 

 

5,707

 

Corporate administration

 

 

(21,495

)   

 

(19,884

)   

 

(10,779

)   

 

(10,598

)

Merger costs

 

 

(1,296

)

 

(1,677

)

 

(1,296

)

 

 

 

 

$

277,542

 

$

253,925

 

$

151,366

 

$

137,319

 


9.          Subsequent Event:

In July, the Company announced an offer to acquire the shares of Sherwood International plc (Sherwood) for approximately $105.0 million, net of Sherwood’s cash balances of approximately $8.0 million. The purchase price is payable in British pounds. On July 15, 2003, the Company purchased 29.5% of the Sherwood shares outstanding for approximately $31.3 million. In order to reduce the Company’s exposure to future exchange rate fluctuations, the Company began to accumulate British pounds and, in addition, entered into a forward contract to purchase 10.0 million British pounds at an exchange rate of $1.6239. Changes in the foreign currency exchange rate from the date the Company enters into a foreign exchange transaction to the date of closing the acquisition will be reflected in the Statement of Income. In addition, the Company’s share (29.5%) of income or loss from Sherwood’s operations from July 15 to August 11, 2003 will be included in the Statement of Income. On August 11, 2003, the Company had approximately 85% of the Sherwood shares owned or tendered and committed unconditionally to close the transaction.

           
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

The following discussion and analysis supplement management’s discussion and analysis in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 and presume that readers have read the discussion and analysis in the Company’s reports filed with the U.S. Securities and Exchange Commission. The following discussion and analysis include historical and certain forward-looking information that should be read together with the accompanying Consolidated Financial Statements, related footnotes, and the discussion below of certain risks and uncertainties that could cause future operating results to differ materially from historical results or from the expected results indicated by forward-looking statements.


10


Table of Contents

RESULTS OF OPERATIONS:

The following table sets forth, for the periods indicated, certain amounts included in the Company’s Consolidated Statements of Income, the relative percentages that those amounts represent to consolidated revenues (unless otherwise indicated), and the percentage changes in those amounts from period to period:

 

 

 

 

 

 

 

 

 

 

 

Percent of  Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

 

 

 

 

 

 

Six months ended

 

Three months ended

 

Six months
 
ended

 

Three months
ended

 

Percent Increase
(Decrease)

 

 

 


 


 


 


 


 

 

 

June 30, (in thousands)

 

June 30, (in thousands)

 

June 30,

 

June 30,

 

Six months

 

Three months

 

 

 


 


 


 


 


 


 

 

 

2003

 

2002

 

2003

 

2002

 

2003

 

2002

 

2003

 

2002

 

2003
vs. 2002

 

2003
vs. 2002

 

 

 


 


 


 


 


 


 


 


 


 


 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment support systems (ISS)

 

$

746,208

 

$

686,943

 

$

394,023

 

$

349,105

 

53

%

56

%

54

%

56

%

9

%

13

%

Availability services (AS)

 

 

579,195

 

 

477,084

 

 

290,900

 

 

239,066

 

41

 

39

 

39

 

38

 

21

 

22

 

Other businesses

 

 

83,121

 

 

67,524

 

 

49,040

 

 

35,157

 

6

 

5

 

7

 

6

 

23

 

39

 

 

 



 



 



 



 


 


 


 


 

 

 

 

 

 

 

$

1,408,524

 

$

1,231,551

 

$

733,963

 

$

623,328

 

100

%

100

%

100

%

100

%

14

 

18

 

 

 



 



 



 



 


 


 


 


 

 

 

 

 

Costs and Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales and direct operating

 

$

625,187

 

$

521,829

 

$

321,777

 

$

266,613

 

44

%

42

%

44

%

43

%

20

%

21

%

Sales, marketing and administration

 

 

261,332

 

 

245,945

 

 

131,866

 

 

114,924

 

19

 

20

 

18

 

18

 

6

 

15

 

Product development

 

 

91,682

 

 

81,565

 

 

49,636

 

 

39,160

 

7

 

7

 

7

 

6

 

12

 

27

 

Depreciation and amortization

 

 

111,486

 

 

94,872

 

 

55,258

 

 

47,564

 

8

 

8

 

8

 

8

 

18

 

16

 

Amortization of acquisition-related intangible assets

 

 

39,999

 

 

31,738

 

 

22,764

 

 

17,748

 

3

 

3

 

3

 

3

 

26

 

28

 

Merger costs

 

 

1,296

 

 

1,677

 

 

1,296

 

 

 

 

 

 

 

n/a

 

n/a

 

 

 



 



 



 



 


 


 


 


 

 

 

 

 

 

 

$

1,130,982

 

$

977,626

 

$

582,597

 

$

486,009

 

80

%

79

%

79

%

78

%

16

 

20

 

 

 



 



 



 



 


 


 


 


 

 

 

 

 

Operating Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment support systems (1)

 

$

143,296

 

$

159,864

 

$

76,117

 

$

82,584

 

19

%

23

%

19

%

24

%

(10

)%

(8

)%

Availability services (1)

 

 

147,701

 

 

105,643

 

 

81,610

 

 

59,626

 

26

 

22

 

28

 

25

 

40

 

37

 

Other businesses (1)

 

 

9,336

 

 

9,979

 

 

5,714

 

 

5,707

 

11

 

15

 

12

 

16

 

(6

)

0

 

Corporate administration

 

 

(21,495

)

 

(19,884

)

 

(10,779

)

 

(10,598

(2

(2

(1

)

(2

)

8

 

2

 

Merger costs

  

 

(1,296

 

(1,677

 

(1,296

 

 

 

 

 

 

n/a

 

n/a

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

277,542

 

$

253,925

 

$

151,366

 

$

137,319

 

20

 

21

 

21

 

22

 

9

 

10

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 


(1) Percent of revenues is calculated as a percent of revenues from ISS, AS and Other Businesses, respectively.

11


Table of Contents

The following table sets forth, for the periods indicated, certain supplemental revenue data, the relative percentages that those amounts represent to consolidated revenues and the percentage changes in those amounts from period to period.

 

 

 

Six months ended June 30,

 

 

 

Three months ended June 30,

 

 

 

 

 


 

 

 


 

 

 

 

 

(in thousands)

 

Percent of revenues

 

Percent
increase
(decrease)

 

(in thousands)

 

Percent of revenues

 

Percent
increase
(decrease)

 

 

 


 


 


 


 


 


 

 

 

2003

 

2002

 

2003

 

2002

 

2003
vs. 2002

 

2003

 

2002

 

2003

 

2002

 

2003
vs. 2002

 

 

 


 


 


 


 


 


 


 


 


 


 

Investment Support Systems

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Services

 

$

657,088

 

$

603,107

 

47

49

9

$

345,221

 

$

308,377

 

47

50

12

%

License and resale fees

 

 

69,833

 

 

74,495

 

5

 

6

 

(6

)

 

38,431

 

 

36,414

 

5

 

6

 

6

 

 

 



 



 


 


 

 

 



 



 


 


 

 

 

Total products and services

 

 

726,921

 

 

677,602

 

52

 

55

 

7

 

 

383,652

 

 

344,791

 

52

 

55

 

11

 

Reimbursed expenses

 

 

19,287

 

 

9,340

 

1

 

1

 

106

 

 

10,371

 

 

4,314

 

1

 

1

 

140

 

 

 



 



 


 


 

 

 



 



 


 


 

 

 

 

 

$

746,208

 

$

686,942

 

53

%

56

%

9

 

$

394,023

 

$

349,105

 

54

%

56

%

13

 

 

 



 



 


 


 

 

 



 



 


 


 

 

 

Availability Services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Services

 

$

571,036

 

$

466,210

 

41

%

38

%

22

%

$

285,605

 

$

236,022

 

39

%

38

%

21

%

License and resale fees

 

 

6,480

 

 

9,330

 

1

 

1

 

(31

)

 

4,659

 

 

2,208

 

2

 

0

 

111

 

 

 



 



 


 


 

 

 



 



 


 


 

 

 

Total products and services

 

 

577,516

 

 

475,540

 

41

 

39

 

21

 

 

290,264

 

 

238,230

 

40

 

38

 

22

 

Reimbursed expenses

 

 

1,679

 

 

1,544

 

 

 

9

 

 

636

 

 

836

 

 

 

(24

)

 

 



 



 


 


 

 

 



 



 


 


 

 

 

 

 

$

579,195

 

$

477,084

 

41

%

39

%

21

 

$

290,900

 

$

239,066

 

40

%

38

%

22

 

 

 



 



 


 


 

 

 



 



 


 


 

 

 

Other Businesses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Services

 

$

57,754

 

$

39,412

 

4

%

3

%

47

%

$

34,817

 

$

20,216

 

5

%

3

%

72

%

License and resale fees

 

 

10,035

 

 

11,071

 

1

 

1

 

(9

)

 

6,545

 

 

6,149

 

1

 

1

 

6

 

 

 



 



 


 


 

 

 



 



 


 


 

 

 

Total products and services

 

 

67,789

 

 

50,483

 

5

 

4

 

34

 

 

41,362

 

 

26,365

 

6

 

4

 

57

 

Reimbursed expenses

 

 

15,332

 

 

17,042

 

1

 

1

 

(10

)

 

7,678

 

 

8,792

 

1

 

1

 

(13

)

 

 



 



 


 


 

 

 



 



 


 


 

 

 

 

 

$

83,121

 

$

67,525

 

6

%

5

%

23

 

$

49,040

 

$

35,157

 

7

%

6

%

39

 

 

 



 



 


 


 

 

 



 



 


 


 

 

 

Total Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Services

 

$

1,285,878

 

$

1,108,729

 

91

%

90

%

16

%

$

665,643

 

$

564,615

 

91

%

91

%

18

%

License and resale fees

 

 

86,348

 

 

94,896

 

6

 

8

 

(9

)

 

49,635

 

 

44,771

 

7

 

7

 

11

 

 

 



 



 


 


 

 

 



 



 


 


 

 

 

Total products and services

 

 

1,372,226

 

 

1,203,625

 

97

 

98

 

14

 

 

715,278

 

 

609,386

 

97

 

98

 

17

 

Reimbursed expenses

 

 

36,298

 

 

27,926

 

3

 

2

 

30

 

 

18,685

 

 

13,942

 

3

 

2

 

34

 

 

 



 



 


 


 

 

 



 



 


 


 

 

 

 

 

$

1,408,524

 

$

1,231,551

 

100

%

100

%

14

 

$

733,963

 

$

623,328

 

100

%

100

%

18

 

 

 



 



 


 


 

 

 



 



 


 


 

 

 


SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002:

INCOME FROM OPERATIONS:

Overall results were consistent with the Company’s expectation. The Company’s total operating margin declined to 20% in 2003 from 21% in 2002 due to declines in ISS and Other Businesses, offset in part by an increase in AS. For SunGard as a whole, taking into account acquisitions completed through June 2003, the Company expects that its full-year 2003 operating margin will approximately equal the full-year 2002 operating margin of 21%.


12


Table of Contents

Investment Support Systems:

The ISS operating margin is 19% and 23% in 2003 and 2002, respectively. The lower margin in 2003 is due primarily to the lower operating margins of acquired businesses and a $13.3 million decline in professional services revenues, offset in part by cost controls.

Availability Services:

The AS operating margin is 26% and 22% for 2003 and 2002, respectively. The higher margin in 2003 is due primarily to cost reductions associated with the successful integration of the availability solutions business of Comdisco, Inc. (CAS), offset in part by the lower margin of Guardian iT plc (Guardian) and higher costs resulting from expansion of the Company’s North American facilities and equipment upgrades throughout the Company’s service offerings. The Guardian integration is proceeding according to plan. As a result of the Guardian acquisition, the Company’s European AS business has doubled in size. The margin from the AS European business is lower than the margin from the North American business primarily due to purchasing preferences which inhibit pan-European services, resulting in lower economies of scale, and, to a lesser extent, a higher percentage of high-availability services which yield lower margins than shared services.

Other Businesses:

The Other Businesses operating margin is 11% and 15% for 2003 and 2002, respectively. The lower margin in 2003 is due primarily to the economic slowdown.

REVENUES:

Total revenues increased $177.0 million, or 14%, in 2003 compared to the same period in 2002 due to acquired businesses. Revenues from products and services of businesses owned for at least 12 months (internal revenues) declined approximately 1% compared to an increase of approximately 3% in the same period in 2002. A decline in ISS internal revenues was mostly offset by an increase in AS internal revenues. The economic slowdown has negatively impacted revenues in all three segments.

Services revenues, which are largely recurring in nature, include revenues from availability services, processing services, software support and rentals, professional services, broker/dealer fees and hardware rentals. In 2003, services revenues increased to $1.29 billion, compared to $1.11 billion in 2002, representing an increase to 91% of total revenues from 90% in 2002. These increases are due primarily to the impact of acquired businesses and higher AS internal revenues, offset in part by lower ISS internal revenues.

Professional services revenues are $174.1 million and $182.9 million for six months ended June 30, 2003 and 2002, respectively. The decrease in 2003 is due primarily to a decrease in ISS revenues, especially from benefit and investor management systems and brokerage and trading systems, offset in part by acquired businesses.

Revenues from license and resale fees are $86.3 million and $94.9 million in 2003 and 2002,


13


Table of Contents

respectively, and include software license revenues of $72.3 million and $73.0 million, respectively. A decline of $10.4 million in internal revenues from software license fees was almost entirely offset by software license fees from acquired businesses. The lower resale fees are due primarily to lower ISS revenues and a nonrecurring $4.9 million AS equipment sale in 2002.

Investment Support Systems:

ISS revenues increased $59.3 million, or 9%, in 2003 compared to the corresponding period in 2002. ISS internal revenues decreased approximately 4% in 2003 compared to an approximate 1% decrease in the same period of 2002. The continued decline in ISS internal revenues is due primarily to the economic slowdown resulting in lower customer spending across ISS.

In 2003, ISS services revenues increased $54.0 million, while ISS license and resale fees decreased $4.7 million. The increase in services revenues is due primarily to acquired businesses, offset in part by a $20.1 million decline in ISS internal revenues from professional services and by a decline in internal revenues from other services in brokerage and trading systems. The decline in license and resale fees is due primarily to lower customer spending for new and existing projects across most ISS businesses, offset in part by acquired businesses.

Availability Services:

AS revenues increased $102.1 million, or 21%, in 2003 compared to the corresponding period in 2002. AS internal revenues increased approximately 5% and 10% in 2003 and 2002, respectively. The two primary factors for the decline in AS internal revenue growth are the economic slowdown and the Company’s ongoing efforts to renew shorter-term CAS contracts at lower monthly fees in exchange for longer contractual commitments. These factors are difficult to separately quantify. The economic slowdown not only has resulted in lower capital spending by customers, but also has left many companies with excess data center capacity that provides them with internal alternatives primarily to high-availability services. Furthermore, the ongoing development of more varied and affordable technology, especially for dedicated high-availability services, continues to provide opportunities for internal solutions. These factors cause intensified pricing and competitive pressures.

Other Businesses:

Revenues from Other Businesses increased $15.6 million, or 23%, in 2003 compared to the corresponding period in 2002. The increase is due to a recent acquisition offset in part by a decline in internal revenues of approximately 2%.

COSTS AND EXPENSES:

Total costs and expenses as a percentage of revenues in 2003 and 2002 were 80% and 79%, respectively, with the higher cost structure of recently acquired businesses offset in part by the impact of cost controls.

Cost of sales and direct operating expenses increased $103.4 million in 2003 and represent 44% and


14


Table of Contents

42% of total revenues in 2003 and 2002, respectively. The increase is due to the acquisitions of Guardian and certain ISS businesses, which, when compared to the Company’s other businesses as a whole, have a higher percentage of total expenses included in cost of sales and direct operating expenses. The increase due to these acquisitions is offset in part by lower cost of sales and direct operating expenses associated with lower ISS sales in 2003 and by a nonrecurring AS equipment sale in 2002.

Sales, marketing and administration expenses declined as a percentage of total revenues to 19% in 2003 compared to 20% for the comparable period in 2002. The decrease is due primarily to cost controls and lower sales costs caused by a decline in internal revenue growth.

Since AS product development costs are insignificant, it is more meaningful to measure product development costs as a percentage of revenues from ISS and Other Businesses. In both 2003 and 2002, product development costs were 11% of revenues from ISS and Other Businesses. Gross development costs capitalized are $5.6 million and $8.3 million in 2003 and 2002, respectively. Amortization of previously capitalized development costs, included in depreciation and amortization, is $4.0 million and $3.4 million in 2003 and 2002, respectively, resulting in net capitalized development costs of $1.6 million and $4.9 million in 2003 and 2002, respectively.

Depreciation and amortization remained at 8% of total revenues, unchanged from the corresponding period in 2002. Total depreciation and amortization increased $16.6 million in 2003, due primarily to the acquisition of Guardian.

Amortization of acquisition-related intangible assets was 3% of total revenues in 2003, consistent with the comparable period in 2002. Amortization of acquisition-related intangible assets increased $8.3 million due to acquired businesses.

Interest income in 2003 and 2002 is $2.9 million and $4.7 million, respectively. The decrease is due to lower cash and investment balances and lower interest rates. Interest expense in 2003 and 2002 is $5.3 million and $7.0 million, respectively. The decrease is due to lower average debt balances under the Company’s credit line and lower interest rates in 2003.

QUARTER ENDED JUNE 30, 2003 COMPARED TO QUARTER ENDED JUNE 30, 2002:

INCOME FROM OPERATIONS:

The Company’s total operating margin declined to 21% in 2003 from 22% in the comparable period in 2002 due to declines in ISS and Other Businesses, offset in part by an increase in AS.

Investment Support Systems:

The ISS operating margin is 19% and 24% in 2003 and 2002, respectively. The lower margin in 2003 is due primarily to the lower operating margins of acquired businesses and a $3.1 million decline in professional services revenues, offset in part by cost controls.


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Availability Services:

The AS operating margin is 28% and 25% for 2003 and 2002, respectively. The higher margin in 2003 is due primarily to cost reductions associated with the successful integration of CAS, offset in part by the lower margin of Guardian and higher costs resulting from expansion of the Company’s North American facilities and equipment upgrades throughout the Company’s service offerings. The Guardian integration is proceeding according to plan. As a result of the Guardian acquisition, the Company’s European AS business has doubled in size. The margin from the AS European business is lower than the margin from the North American business primarily due to purchasing preferences which inhibit pan-European services, resulting in lower economies of scale and, to a lesser extent, a higher percentage of high-availability services which yield lower margins than shared services.

Other Businesses:

The Other Businesses operating margin is 12% and 16% for 2003 and 2002, respectively. The lower margin in 2003 is due primarily to the economic slowdown.

REVENUES:

Total revenues increased $110.6 million, or 18%, in 2003 compared to the same period in 2002 due to acquired businesses. Internal revenues declined approximately 1% compared to an increase of approximately 3% in the same period in 2002. A decline in ISS internal revenues was mostly offset by an increase in AS internal revenues. The economic slowdown has negatively impacted revenues in all three segments.

Services revenues increased to $665.6 million in 2003, compared to $564.6 million in 2002, representing 91% of total revenues in each period. The increase in 2003 is due primarily to the impact of acquired businesses and higher AS internal revenues, offset in part by lower ISS internal revenues.

Professional services revenues are $93.8 million and $93.0 million in 2003 and 2002, respectively. The increase in 2003 is due to the impact of acquired businesses offset by a decrease in internal ISS revenues, especially from benefit and investor management systems.

Revenues from license and resale fees are $49.6 million and $44.8 million in 2003 and 2002, respectively, and include software license revenues of $40.5 million and $36.6 million, respectively. The increase in software license revenues in 2003 is due to license revenues from acquired businesses, offset by a $4.7 million decline in internal revenue due primarily to the economic slowdown resulting in lower customer spending for new software systems.

Investment Support Systems:

ISS revenues increased $44.9 million, or 13%, in 2003 compared to the corresponding period in 2002. ISS internal revenues decreased approximately 5% in 2003 compared to flat internal revenues in the same period of 2002. The continued decline in ISS internal revenues is due primarily to the economic slowdown


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resulting in lower customer spending across ISS.

In 2003, ISS services revenues increased $36.8 million, while ISS license and resale fees increased $2.0 million. The increase in services revenues is due to acquired businesses, offset in part by a $9.8 million decline in ISS internal revenues from professional services and by a decline in internal revenues from other services in brokerage and trading systems. The increase in license and resale fees is due to acquired businesses, offset in part by lower customer spending for new and existing projects across most ISS businesses.

Availability Services:

AS revenues increased $51.8 million, or 22%, in 2003 compared to the corresponding period in 2002. AS internal revenues increased approximately 4% and 9% in 2003 and 2002, respectively. The two primary factors for the decline in AS internal revenue growth are the economic slowdown and the Company’s ongoing efforts to renew shorter-term CAS contracts at lower monthly fees in exchange for longer contractual commitments. These factors are difficult to separately quantify. The economic slowdown not only has resulted in lower capital spending by customers, but also has left many companies with excess data center capacity that provides them with internal alternatives primarily to high-availability services. Furthermore, the ongoing development of more varied and affordable technology, especially for dedicated high-availability services, continues to provide opportunities for internal solutions. These factors cause intensified pricing and competitive pressures.

Other Businesses:

Revenues from Other Businesses increased $13.9 million, or 39%, in 2003 compared to the corresponding period in 2002. The increase is due to a recent acquisition offset in part by a decline in internal revenues of approximately 4%.

COSTS AND EXPENSES:

Total costs and expenses as a percentage of revenues in 2003 and 2002 were 79% and 78%, respectively, with the higher cost structure of recently acquired businesses offset in part by the impact of cost controls.

Cost of sales and direct operating expenses increased $55.2 million in 2003 and represent 44% and 43% of total revenues in 2003 and 2002, respectively. The increase is due to the acquisitions of Guardian and certain ISS businesses, which have a higher percentage of total expenses included in cost of sales and direct operating expenses. The increase due to these acquisitions is offset in part by lower cost of sales and direct operating expenses associated with lower ISS sales in 2003.

Since AS product development costs are insignificant, it is more meaningful to measure product development costs as a percentage of revenues from ISS and Other Businesses. In 2003 and 2002, product development costs were 11% and 10% of revenues from ISS and Other Businesses, respectively. Gross development costs capitalized are $2.9 million and $4.1 million in 2003 and 2002, respectively. Amortization of previously capitalized development costs, included in depreciation and amortization, is


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$2.2 million and $1.7 million in 2003 and 2002, respectively, resulting in net capitalized development costs of $0.7 million and $2.4 million in 2003 and 2002, respectively.

Depreciation and amortization remained at 8% of total revenues, unchanged from the corresponding period in 2002. Total depreciation and amortization increased $7.7 million in 2003 due primarily to the acquisition of Guardian, offset in part by fully depreciated assets from the CAS acquisition with shorter lives.

Amortization of acquisition-related intangible assets is 3% of total revenues in 2003 and 2002. Amortization of acquisition-related intangible assets increased $5.0 million due to acquired businesses.

Interest income in 2003 and 2002 is $1.6 million and $2.4 million, respectively. The decrease is due to lower cash and investment balances and lower interest rates. Interest expense in 2003 and 2002 is $3.5 million and $2.8 million, respectively. The increase is due to higher average debt balances under the Company’s credit line, offset in part by lower interest rates.

LIQUIDITY AND CAPITAL RESOURCES:

At June 30, 2003, cash and equivalents are $379.7 million, a decrease of $60.0 million from December 31, 2002. Cash flow from operations was approximately 1.6 times net income, or $262.2 million, a decrease of $84.6 million compared with the six months ended June 30, 2002, when cash flow from operations was approximately 2.3 times net income. The ratio of cash flow from operations to net income in 2002 was higher than the Company’s full-year 2001 and 2000 ratios of 1.9 and 1.5, respectively, because of collections in 2002 of acquired accounts receivable from the CAS acquisition. In addition, during 2003, the volume of payments relating to accounts payable and accrued expenses was higher than in 2002, due primarily to businesses acquired in 2003.

In 2003, the Company used its operating cash flow, net borrowings of $91.1 million and a portion of its existing cash to acquire six businesses for $313.1 million (net of cash acquired), to pay $15.0 million for the contingent purchase price of a previously acquired business, and to purchase property, equipment and software totaling $108.7 million. At June 30, 2003, the Company has $18.2 million of short-term debt and $285.3 million of long-term debt, while stockholders’ equity exceeds $2.4 billion.

In addition to its short- and long-term debt, the Company’s remaining commitments consist primarily of operating leases for computer equipment and facilities, the pending acquisition of Sherwood International plc (Sherwood), and contingent purchase price obligations for previously completed acquisitions, subject to the operating performance of the acquired businesses. The Company expects to use approximately $105.0 million of net cash during the third quarter of 2003 to acquire Sherwood (see Note 9 of Notes to Consolidated Financial Statements). The maximum amount of contingent purchase price obligations due within the next year is $87.0 million and due within the next three years is $205.0 million. The Company also has outstanding letters of credit and bid bonds that total approximately $26.4 million.

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, debt repayments, contingent


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payments in connection with business acquisitions, and ordinary capital spending needs. At June 30, 2003, the Company has an unused $225.0 million revolving credit agreement. The Company believes that it has the capacity to secure additional credit or issue equity to finance additional capital needs.

EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS:

In June 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which provides guidance on the accounting for costs associated with exit or disposal activities unrelated to an acquisition. SFAS 146 is effective for exit and disposal activities that are initiated after December 31, 2002. The Company does not believe that SFAS 146 will have a material impact on its results of operations.

In October 2002, the FASB issued SFAS No. 147, “Acquisitions of Certain Financial Institutions—an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9.” This Statement provides interpretive guidance on the application of the purchase method to acquisitions of financial institutions and is not currently applicable to the Company.

In November 2002, the Emerging Issues Task Force reached a consensus on EITF Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables,” which provides further guidance on accounting for contracts that involve multiple revenue-generating activities or deliverables and is effective for agreements entered into in fiscal periods beginning after June 15, 2003. The Company does not believe that EITF 00-21 will have a material impact on its results of operations.

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires that a liability be recorded in the guarantor’s balance sheet upon issuance of certain guarantees. In addition, FIN 45 requires disclosure about the guarantees that an entity has issued. The Company’s customer contracts generally include typical customer indemnification, primarily for intellectual property infringement claims. Liabilities in connection with such obligations have not been material.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, which provides alternative transition methods for a voluntary change to the fair value-based method of accounting for stock-based employee compensation and prevents the use of the prospective transition method for companies who do not adopt the expensing method for stock compensation in fiscal 2003. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require disclosures in both annual and quarterly financial statements of the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has not changed the way it accounts for stock-based employee compensation and continues to account for its stock-based compensation in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees.” However, the Company has adopted the disclosure provisions of SFAS No. 148.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46). FIN 46 requires a variable interest entity to be consolidated by a company if that


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company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns or both. The Company does not have any variable interest entities.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The Company does not believe that SFAS 149 will have a material impact on its results of operations.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The Company does not believe that SFAS 150 will have a material impact on its results of operations.

CERTAIN RISKS AND UNCERTAINTIES:

Statements about the Company’s expected margins, revenues and spending and all other statements in this Form 10-Q other than historical facts are forward-looking statements. These statements are subject to risks and uncertainties that may change at any time, and, therefore, actual results may 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: general economic and market conditions, including their effect on information technology spending levels, trading volumes and services revenues, and including the fact that the economic slowdown has left many companies with excess data center capacity that provides them with internal alternatives primarily to high-availability services; the overall condition of the financial services industry, including the effect of any further consolidation among financial services firms, and including the market and credit risks associated with clearing broker operations; the effect of war, terrorism or catastrophic events; the timing and magnitude of software sales; the timing and scope of technological advances; the integration and performance of acquired businesses, including the availability services business of Guardian, acquired on July 1, 2002; the prospects for future acquisitions; the ability to retain and attract customers and key personnel; and the ability to obtain patent protection and avoid patent-related liabilities in the context of a rapidly developing legal framework for software and business-method patents. The factors described in this paragraph and other factors that may affect SunGard, its business or future financial results, as and when applicable, are discussed in the Company’s filings with the Securities and Exchange Commission, including this Report and the Company’s Form 10-K for the year ended December 31, 2002, a copy of which may be obtained from SunGard without charge.

Item 3.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:


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The Company has rarely used derivative financial instruments to manage risk exposures and has never used derivative financial instruments for trading or speculative purposes (see Note 9 of Notes to Consolidated Financial Statements). Available cash is invested in short-term, highly liquid financial instruments, with a substantial portion of such investments having initial maturities of three months or less, and, in connection with the Company’s acquisition program, the Company borrows cash from time to time under the terms of its variable-rate credit facility. While changes in interest rates could decrease interest income or increase interest expense, the Company does not believe that it has a material exposure to changes in interest rates. Based on borrowings under the credit facility of $275.0 million at June 30, 2003, a 1% change in the borrowing rate would increase annual interest expense related to the credit facility by $2.75 million.


Item 4. CONTROLS AND PROCEDURES:

(a)        Evaluation of Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this Report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of the end of the period covered by this Report were designed and functioning effectively to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. However, the Company cautions that a system of controls, no matter how well designed and operated, cannot provide absolute assurance that its objectives are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

(b)        Change in Internal Control over Financial Reporting

No change in the Company’s internal control over financial reporting occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II.              OTHER INFORMATION:

ITEM 1.       LEGAL PROCEEDINGS: None.

ITEM 2.      CHANGES IN SECURITIES AND USE OF PROCEEDS: None.

ITEM 3.      DEFAULTS UPON SENIOR SECURITIES: None.

ITEM 4.      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:

(a)        The 2003 Annual Meeting of Stockholders of the registrant was held on May 9, 2003.


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(b)    At the 2003 Annual Meeting, the following were elected as directors:

 

 DIRECTOR

 

FOR

 

WITHHELD

 

Gregory S. Bentley

 

165,651,703

 

91,817,261

 

Michael C. Brooks

 

244,010,499

 

13,458,465

 

Cristóbal Conde

 

249,734,618

 

7,734,345

 

Ramon de Oliveira

 

246,581,983

 

10,886,980

 

Henry C. Duques

 

214,014,837

 

13,454,126

 

Albert A. Eisenstat

 

243,879,158

 

13,589,805

 

Bernard Goldstein

 

243,883,199

 

13,585,765

 

Janet Brutschea Haugen

 

246,667,849

 

10,801,115

 

James L. Mann

 

248,630,362

 

8,838,601

 

Malcolm I. Ruddock

 

246,664,612

 

10,804,352

 


(c)     At the 2003 Annual Meeting, the appointment of PricewaterhouseCoopers LLP as the corporation’s independent accountants for 2003 was ratified by the following vote:

 

Votes in favor

 

241,440,711

 

Votes against

 

14,686,552

 

Votes abstaining

 

1,341,700

 

Broker non-votes

 

0

 


ITEM 5.      OTHER INFORMATION: None.

ITEM 6.      EXHIBITS AND REPORTS ON FORM 8-K:

(a)      Exhibits:

31.1 - Certification of Cristóbal Conde required by Rule 13a-14(a) or Rule 15d-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002

31.2 - Certification of Michael J. Ruane required by Rule 13a-14(a) or Rule 15d-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002

32.1 - Certification of Cristóbal Conde required by Rule 13a-14(b) or Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002

32.2 - Certification of Michael J. Ruane required by Rule 13a-14(b) or Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002

(b)      Reports on Form 8-K:

Form 8-K, filed on April 23, 2003, to furnish the Company’s earnings release, dated April 23, 2003, reporting its financial results for the quarter ended March 31, 2003.

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SIGNATURES

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.

 

 

 

SUNGARD DATA SYSTEMS INC.


          Date:  August 14, 2003

 

By: 


/s/ Michael J. Ruane

 

 

 

Michael J. Ruane
Senior Vice President-Finance and
     Chief Financial Officer
(Principal Financial Officer)

 


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EXHIBIT INDEX

 

Exhibit No.

Document

 

 

31.1

Certification of Cristóbal Conde required by Rule 13a-14(a) or Rule 15d-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002

 

 

31.2

Certification of Michael J. Ruane required by Rule 13a-14(a) or Rule 15d-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002

 

 

32.1

Certification of Cristóbal Conde required by Rule 13a-14(b) or Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002

 

 

32.2

Certification of Michael J. Ruane required by Rule 13a-14(b) or Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002