S-1 1 d924335ds1.htm S-1 S-1
Table of Contents

As filed with the Securities and Exchange Commission on June 3, 2015

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

SunGard

(Exact name of registrant as specified in its charter)

 

 

 

Delaware 7372 20-3059890

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

680 East Swedesford Road

Wayne, Pennsylvania 19087

(484) 582-5400

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Victoria E. Silbey, Esq.

Senior Vice President—Legal and Chief Legal Officer

SunGard

680 East Swedesford Road

Wayne, Pennsylvania 19087

(484) 582-5400

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

With copies to:

 

Richard A. Fenyes, Esq.

Simpson Thacher & Bartlett LLP

425 Lexington Avenue

New York, New York 10017-3954

(212) 455-2000

 

Thomas Holden, Esq.

Patrick O’Brien, Esq.

Ropes & Gray LLP

3 Embarcadero Center

San Francisco, California 94111-4006

(415) 315-6300

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Proposed

Maximum

Aggregate

Offering Price(1)(2)

 

Amount of

Registration Fee

Common Stock, par value $0.01 per share

  $100,000,000   $11,620

 

 

(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended (the “Securities Act”).
(2) Includes additional shares that the Underwriters have the option to purchase to cover over-allotments, if any. See “Underwriting (Conflicts of Interest).”

 

 

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion, Dated June 3, 2015

            Shares

 

 

 

LOGO

Common Stock

 

 

This is an initial public offering of shares of common stock of SunGard. We are offering             shares of our common stock.

Prior to this offering, there has been no public market for our common stock. We currently estimate that the initial public offering price per share will be between $             and $            . We intend to apply to list our common stock on                     under the symbol “             .” After the completion of this offering, affiliates of Bain Capital Partners, The Blackstone Group, Goldman, Sachs & Co., KKR & Co. L.P., Providence Equity Partners, Silver Lake Partners and TPG Capital (collectively, the “Sponsors”) will continue to own a majority of the voting power of all outstanding shares of our common stock. As a result, we will be a “controlled company” within the meaning of the corporate governance standards of         . See “Principal Stockholders.”

Investing in our common stock involves risk. See “Risk Factors” on page 14 to read about factors you should consider before buying shares of our common stock.

 

 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per
Share
     Total  

Initial public offering price

   $                    $                

Underwriting discounts and commissions(1)

   $         $     

Proceeds, before expenses, to us

   $         $     

 

  (1) See “Underwriting (Conflicts of Interest).”

To the extent that the underwriters sell more than             shares of common stock, the underwriters have the option to purchase up to an additional             shares from us at the initial price to the public, less the underwriting discounts and commissions, within 30 days of the date of this prospectus.

 

 

The underwriters expect to deliver the shares against payment in New York, New York on                     , 2015.

Joint Book-Running Managers

 

J.P. Morgan   Goldman, Sachs & Co.   Barclays   Deutsche Bank Securities   Credit Suisse

 

BofA Merrill Lynch          
  Citigroup        
    Morgan Stanley      
      RBC Capital Markets    
        UBS Investment Bank  
          Wells Fargo Securities

 

 

Prospectus dated                     , 2015.


Table of Contents

TABLE OF CONTENTS

Prospectus

 

     Page  

Industry and Market Data

     ii   

Non-GAAP Measures

     ii   

Trademarks

     iii   

Prospectus Summary

     1   

Risk Factors

     14   

Special Note Regarding Forward-Looking Statements

     33   

Use of Proceeds

     35   

Dividend Policy

     36   

Dilution

     37   

Recapitalization

     39   

Capitalization

     40   

Selected Historical Consolidated Financial Data

     42   

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

     46   

Business

     87   

Management

     98   

Principal Stockholders

     133   

Certain Relationships and Related Party Transactions

     138   

Description of Indebtedness

     141   

Description of Capital Stock

     146   

Shares Eligible For Future Sale

     154   

Certain United States Federal Income and Estate Tax Consequences to Non-U.S. Holders

     157   

Underwriting (Conflicts of Interest)

     160   

Legal Matters

     167   

Experts

     167   

Where You Can Find More Information

     167   

Index to Consolidated Financial Statements

     F-1   

 

 

Through and including                     , 2015 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

 

We have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

Unless otherwise indicated or the context otherwise requires, financial data in this prospectus reflects the consolidated business and operations of SunGard and its consolidated subsidiaries.

The consolidated financial statements of SunGard included in this prospectus are presented in U.S. Dollars rounded to the nearest million, with amounts in this prospectus rounded to the nearest million, except for per share amounts. Therefore, discrepancies in the tables between totals and the sums of the amounts listed may occur due to such rounding. The accounting policies set out in the audited consolidated financial statements contained elsewhere in this prospectus have been consistently applied to all periods presented.

 

i


Table of Contents

INDUSTRY AND MARKET DATA

This prospectus includes industry and trade association data, forecasts and information that we have prepared based, in part, upon data, forecasts and information obtained from independent trade associations, industry publications and surveys and other information available to us. Some data is also based on our good faith estimates, which are derived from management’s knowledge of the industry and independent sources.

NON-GAAP MEASURES

This prospectus contains “non-GAAP measures” that are financial measures that either exclude or include amounts that are not excluded or included in the most directly comparable measures calculated and presented in accordance with generally accepted accounting principles in the United States (“GAAP”). Specifically, we make use of the non-GAAP financial measures “Adjusted EBITDA” and “Constant-Currency Basis.”

Adjusted EBITDA

Our primary non-GAAP measure is Adjusted EBITDA, whose corresponding GAAP measure is net income (loss). We define Adjusted EBITDA as net income (loss) less income (loss) from discontinued operations, income taxes, loss on extinguishment of debt, interest expense and amortization of deferred financing fees, depreciation (including the amortization of capitalized software), amortization of acquisition-related intangible assets, trade name and goodwill impairment charges, severance and facility closure charges, stock compensation expense, management fees from our Sponsors, and certain other costs.

We believe Adjusted EBITDA is an effective tool to measure our operating performance since it excludes non-cash items and certain variable charges. We use Adjusted EBITDA extensively to measure the financial performance of SunGard, and also to report our results to our board of directors. We use a similar measure, as defined in our senior secured credit agreement, for purposes of computing our debt covenants.

While Adjusted EBITDA and similar measures are frequently used as measures of operations and the ability to meet debt service requirements, these terms are not necessarily comparable to other similarly titled captions of other companies due to the potential inconsistencies in the method of calculation. Adjusted EBITDA does not reflect the impact of earnings or charges resulting from matters that we may consider not to be indicative of our ongoing operations. In particular, the definition of Adjusted EBITDA adds back certain noncash, extraordinary or unusual charges that are deducted in calculating net income (loss). However, these are expenses that may recur, vary greatly and are difficult to predict. Further, our debt instruments require that Adjusted EBITDA be calculated for the most recent four fiscal quarters. As a result, the measure as calculated under our debt instruments can be disproportionately affected by a particularly strong or weak quarter. Further, Adjusted EBITDA may not be comparable to the measure for any subsequent four-quarter period or any complete fiscal year. Adjusted EBITDA should not be considered as an alternative to cash flows from operating activities, as a measure of liquidity or as an alternative to operating income or net income as indicators of operating performance.

Constant-Currency Basis

We supplement Adjusted EBITDA with comparable measures on a constant-currency basis, a non-GAAP measure, which exclude the impacts from changes in currency translation. We believe providing explanations of the year to year variances in our results on a constant-currency basis is meaningful for assessing how our underlying businesses have performed due to the fact that we have international operations that are material to our overall operations. As a result, total revenue and expenses are affected by changes in the U.S. Dollar against international currencies. To present our constant currency (year-over-year) changes, current period results for entities reporting in currencies other than U.S. Dollars are converted to U.S. Dollars at the average exchange rate used in the prior-year period rather than the actual exchange rates in effect during the current-year period.

 

ii


Table of Contents

TRADEMARKS

We own or have the right to use the trademarks, service marks and trade names that we use in connection with the operation of our business, including the SunGard® name and logo and other names and marks that identify our products and services. Other trademarks, service marks and trade names used in this prospectus are, to our knowledge, the property of their respective owners. Solely for convenience, the trademarks, service marks and trade names referred to in this prospectus are listed without the ® and ™ symbols, but such omissions are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights to these trademarks, service marks and trade names.

 

iii


Table of Contents

PROSPECTUS SUMMARY

This summary highlights certain significant aspects of our business and this offering. This is a summary of information contained elsewhere in this prospectus, is not complete and does not contain all of the information that you should consider before making your investment decision. You should carefully read the entire prospectus, including the information presented under the sections entitled “Risk Factors” and “Special Note Regarding Forward-Looking Statements” and the consolidated financial statements and the notes thereto, before making an investment decision. This summary contains forward-looking statements that involve risks and uncertainties. Our actual results may differ significantly from future results contemplated in the forward-looking statements as a result of certain factors such as those set forth in the sections entitled “Risk Factors” and “Special Note Regarding Forward-Looking Statements.”

Unless the context indicates otherwise, all references herein to “SunGard,” the “Company,” “we,” “us” and “our” refers to SunGard and its consolidated subsidiaries, including SunGard Data Systems Inc. (“SDS”). The historical financial statements and financial data included in this prospectus are those of SunGard and its consolidated subsidiaries.

 

 

Our Company

SunGard is a leading provider of mission-critical software to financial institutions globally. Our solutions automate a wide range of complex business processes across the financial services industry, including those associated with trading, securities operations, administering investment portfolios, accounting for investment assets, and managing risk and compliance requirements. We are the largest provider of industry-specific software by revenue across the segments that we serve, and are differentiated by the breadth of our offerings, leading edge technology, operating scale, deep domain expertise, and global reach. In 2014, we generated $2.8 billion in revenue, 70% of which was recurring, along with attractive operating margins and strong cash flows.

We serve a large, global customer base across multiple vertically-focused groups in the financial services industry. We have more than 15,000 customers in more than 100 countries, encompassing some of the largest financial institutions in the world, including:

 

    nearly 90% of the world’s 50 largest banks;

 

    more than 80% of the world’s 50 largest asset managers;

 

    the world’s 10 largest private equity firms; and

 

    more than 80% of the world’s 50 largest insurance companies.

Our solutions are designed to address the needs of a broad range of end users, including asset managers, CFOs and treasurers, traders on the sell-side and buy-side, securities operations managers, fund administrators, risk and compliance officers, plan administrators, and registered investment advisors.

Financial institutions are undergoing rapid and substantial change as they seek to deliver satisfactory shareholder returns in an environment of intensifying regulatory complexity, increasing capital requirements, heightened demand for transparency, and continued competitive pressure. This change places significant and growing demands on our customers’ operations. In response, we believe our customers are increasingly relying on third-party information technology (“IT”) providers to help them address these challenges and are also consolidating their spending with trusted partners who have the scale, reach, expertise and innovative technology to handle their specialized business processes. We believe we are well positioned to meet these market needs through our distinctive combination of capabilities, assets, and market position.

Throughout our long history we have established ourselves as a domain expert and a trusted partner to our customers, many of whom we have served for well over a decade. This experience has enabled us to accumulate

 

 

1


Table of Contents

the significant knowledge and capabilities required to address their greatest needs. As a result, our customers use our software to power many of their most mission-critical business processes.

SunGard provides a robust solutions set across a large portion of the global financial services market, spanning buy-side to sell-side firms to corporates and energy companies. Our principal solutions are organized in the following vertically-focused groups:

 

    Asset Management

 

    Corporate Liquidity and Energy

 

    Global Trading

 

    Insurance

 

    Post-Trade Processing

 

    Risk and Compliance

 

    Securities Finance and Processing

 

    Wealth and Retirement Administration

Our solutions are grounded in a core set of competencies that are shared across the vertically-focused markets we serve, enabling us to leverage our cumulative knowledge and capabilities across the broader financial services industry. These competencies include record-keeping and investment accounting functions, risk measurement and management, trade enablement, regulatory reporting and compliance, and securities, futures, and transactions processing.

These competencies are the foundation of our software, which we surround with services, expanding our addressable market and creating new growth opportunities. Our services include software as a service (“SaaS”) offerings as well as hosting and application management services delivered from our private cloud. We also provide professional services that help our customers to install, optimize, and integrate our software. More recently, we have expanded our offerings to encompass business process as a service (“BPaaS”), which includes utility offerings, where we have the ability to manage and operate customer processes centered around our software.

In addition to our principal solutions, we also serve the Public Sector and Education (“PS&E”) market, where we provide domain specific, mission-critical enterprise resource planning (“ERP”) and administrative software primarily to domestic local and state governments and K-12 learning institutions. PS&E represented 8% of our revenue in 2014.

Our business model is characterized by predictable and recurring revenue. Our recurring revenue, which comprised 70% of our 2014 revenue and had a 95% retention rate, is derived from our deeply embedded solutions and long-running contracts for software maintenance, rentals, SaaS, cloud and BPaaS offerings. This recurring revenue visibility allows us to proactively manage spending and generate attractive operating profit margins and high cash flow conversion.

In 2014, we generated $2.8 billion in revenues. We classify our revenue into three categories: Software, SaaS and cloud, and Services, which contributed 40%, 38%, and 22% of 2014 revenues, respectively. Our revenues are highly diversified, with 64% of 2014 revenues generated from activity in North America and the remaining 36% generated outside of North America. Our largest customer accounted for approximately 3% of our 2014 revenues. Furthermore, in 2014, $330 million of our revenues came from China, India, Southeast Asia, Middle East, Africa, Latin America and Eastern Europe, which are growing significantly faster than the established markets and are referred to herein as “emerging markets.”

 

 

2


Table of Contents

Our Transformation

In 2011, we embarked on a major transformation program to create a more integrated enterprise, focused primarily on the financial services industry. Led by a new executive leadership team, we exited non-core business lines representing more than $2 billion in revenues including the sale of Higher Education in January 2012 ($492 million in 2011 revenue), the split-off of Availability Services in March 2014 ($1.4 billion in 2013 revenue) (the “AS Split-Off”) and other smaller divestitures. In addition, within our Financial Systems segment, we exited slower growing or low margin business lines representing $203 million in revenues since 2010. We then instituted an enterprise-wide operating model supported by functional leaders from across the industry. We believe these changes allow us to take better advantage of SunGard’s scale, breadth and decades-long, trusted customer relationships across the financial services industry.

We also embarked on an internally-funded organic growth strategy, which involved reallocating investments to our most critical products, creating the integrated solutions that our customers require, and developing new solutions that address their most pressing needs. Further, in an effort to help our customers streamline their businesses, we invested in additional SaaS and cloud delivery models and selectively built BPaaS offerings that surround our software. These capabilities enable us to take on IT and operations functions previously performed by our customers, which we believe increase our revenue opportunity and drive more value for our customers.

In addition, we enhanced our go-to-market capabilities, allowing us to engage with higher level business leaders in our customers’ organizations. We also added sales resources to enhance our sales capacity, effectiveness and global reach. Finally, we added functional leadership from across the technology industry to bring best-in-class processes to SunGard.

We believe our results validate our strategy and the success of our transformation. Our year-over-year revenue growth rate has improved significantly since 2012 and has accelerated over time as our investments in product development, sales and local delivery capacity have taken hold. Our revenue has now grown in five of the last six quarters and our most recent quarters have been our strongest. At constant currency, our growth rate has been 4% in third quarter 2014, 5% in fourth quarter 2014, and 6% in first quarter 2015. The third quarter 2014 year-over-year comparison excludes the one-time benefit from the sale of a customer bankruptcy claim in third quarter 2013.

Industry Overview and Market Opportunity

According to IDC, IT spending in the financial services segments that we serve totaled nearly $190 billion in 2014. Within this market, spending with external vendors was $87 billion in 2014 and is growing faster than internal spending. In particular, spending on third-party software is the fastest growing portion, projected to grow at a 7% annual rate from $35 billion in 2014 to $45 billion by 2018. We believe this shift in spending represents a growing opportunity for market leaders that can comprehensively address the continually expanding needs of their customers.

Within this context, there are a number of interrelated macroeconomic trends shaping the industry. Specifically:

Increasing Regulatory and Compliance Burden. The financial services industry continues to be impacted by complex, changing and often inconsistent regulations from numerous regulatory bodies. To manage this complex and fractious environment, firms are increasingly turning to solution providers that have the scale and domain expertise to efficiently address these new regulatory rules, which would be very difficult and costly for a firm to otherwise address on its own.

The Proliferation of Electronic Financial Markets. The infrastructure of the financial markets is becoming increasingly automated. Many products that were once traded over-the-counter, such as interest rate

 

 

3


Table of Contents

swaps and credit default swaps, are moving to electronic processing or trading venues. Increased regulation and the need for transparency and efficiency, faster clearing and settlement, and better risk management are driving a movement in the industry towards greater automation of these processes. Technology providers that can facilitate this trend will be well positioned to benefit.

Increasing Importance of Buy-Side in Financial Markets. Asset managers, hedge funds, and private equity firms have assumed a more prominent role in the global financial markets, including more actively engaging in traditional sell-side activities such as trading and market making. As a result, there has been a rise in spending on technology solutions across this market vertical.

Emerging Markets Growth. Emerging markets continue to exhibit strong growth as regional firms develop and expand, while multi-national firms are concurrently looking to move into these markets in pursuit of new growth. Local firms, unburdened by legacy offerings and with a wide range of needs, are frequently looking to technology providers that have global reach, a comprehensive set of solutions, and a full set of software and service capabilities that will help them expand on an accelerated basis. Moreover, multi-nationals often seek global partners that can help them operate locally while managing globally.

Streamlining and Focusing the Enterprise. We believe a key focus of many financial institutions is to reduce internal spending on proprietary technology in order to focus on areas that can provide competitive differentiation. As part of this effort, we expect firms to continue to embrace less resource-intensive delivery models (including SaaS, cloud, and BPaaS) and seek to standardize around market leading solutions, in recognition of a regulatory environment that increasingly values conformity.

Consolidating Vendor Relationships. We believe financial institutions are consolidating their supplier relationships with a smaller number of trusted partners that can provide holistic, global solutions. Software providers are no longer expected to provide just individual point solutions, but rather integrated solutions that have broad capabilities, a comprehensive set of delivery models, and global reach and scale. In addition, we believe large, stable enterprises will be better suited to address the extensive procurement processes and rigorous screening criteria that financial institutions place on third-party vendors in today’s more tightly regulated world.

Our Competitive Strengths

We have established our leading market position through a number of key competitive strengths:

Market and Technological Leadership. We are the largest provider of industry-specific software by revenue across the segments that we serve, which include the vast majority of the world’s leading financial institutions. Our solutions address some of the most complex and challenging processes in the industry. Because of the depth of our customer relationships, our recognized technological leadership, and our established incumbency, we believe that we are well positioned in the industry.

Industry Focus and Deep Domain Expertise. The financial services industry is a complex, dynamic, and highly regulated market. Our focus on the financial services industry and our decades of experience have enabled us to accumulate the knowledge and breadth of capabilities needed to serve this demanding market.

Deeply Embedded and Mission-Critical Platforms. Many of SunGard’s solutions perform mission-critical activities that are central to our customers’ core operational workflows. As a result, we experienced high retention rates of 95% for our recurring revenues in 2014.

Comprehensive Solution Portfolio. We believe customers are consolidating their vendor relationships and are seeking trusted partners who can deliver integrated solutions that comprehensively address their needs across

 

 

4


Table of Contents

the front-, mid- and back-office. With our broad set of market-leading solutions, SunGard is well suited to provide a significant portion of our customers’ technology requirements. Additionally, we are able to surround our solutions with value-added services, including global delivery centers, professional implementation and optimization services, as well as BPaaS offerings.

Global Scale and Reach. SunGard has the global scale and reach to sell, deploy, deliver and support its software across the world. We serve customers in more than 100 countries, supported by 13,000 employees operating out of offices in every major geographic region, including approximately 500 global quota carrying salespeople and more than 4,700 development staff. Of the $2.8 billion in revenue that we generated in 2014, approximately 36% was generated outside of North America, including the faster-growing emerging markets.

Our Growth Strategy

As the leading provider of industry-specific software across the segments of the financial services industry that we serve, we believe we are well positioned to capitalize on the major market trends. The key elements of our growth strategy include:

Leverage and Enhance our Software. Over the past three years, we have invested $1.3 billion in global development across our Company to enhance and differentiate our proprietary software. We are investing in areas where we see increased customer demand and are continuing to develop innovative software and integrated solutions for both new and existing customers.

Increase Penetration as Customers Consolidate Spending. We believe the breadth of our products and services is unmatched across the markets we serve, and together with our existing customer footprint, positions us well as financial institutions seek to consolidate their vendor relationships.

Expand Breadth of Services Offerings. By surrounding our software with services, we believe we provide more value to our customers, deepen our customer relationships, expand our addressable market, and accelerate growth. The underlying market trends support this shift, with customers increasingly demanding higher levels of service in implementing, optimizing, maintaining, and operating our solutions. For example, we recently announced an industry utility for post-trade derivatives.

Enhance Salesforce Effectiveness. We believe our award winning salesforce is a particularly valuable asset in driving the growth of our company. We have instituted a selective and deliberate strategy to increase our sales capacity around the globe and expect our growth to continue as this strategy takes hold.

Focus on Emerging Markets. Emerging markets continue to grow strongly and SunGard’s global sales and operational footprint, extensive solution portfolio, and strong market position enables us to target this growth. We intend to further expand into new geographies and allocate sales and delivery resources to key geographic markets such as emerging Asia, Latin America, Middle East, and Africa.

Risks Related to Our Business and this Offering

Investing in our common stock involves substantial risk, and our ability to successfully operate our business is subject to numerous risks, including those that are generally associated with operating in the software and technology services industry. Any of the factors set forth under “Risk Factors” may limit our ability to successfully execute our business strategy. You should carefully consider all of the information set forth in this prospectus and, in particular, should evaluate the specific factors set forth under “Risk Factors” in deciding whether to invest in our common stock.

 

 

5


Table of Contents

Corporate Information

We are a holding company and conduct our operations through our direct and indirect subsidiaries, primarily SDS and its subsidiaries. SDS was incorporated in 1982. We were incorporated in June 2005 in connection with the acquisition of SDS, which we refer to as the “Acquisition” or the “LBO,” by a consortium of private equity investment funds associated with Bain Capital Partners, The Blackstone Group, Goldman, Sachs & Co., Kohlberg Kravis Roberts & Co., Providence Equity Partners, Silver Lake and TPG, which we refer to collectively as the “Sponsors.”

After giving effect to this offering, our Sponsors will beneficially own approximately       % of our issued and outstanding common stock (assuming no exercise of the underwriters’ option to purchase additional shares) or       % of our issued and outstanding common stock (assuming full exercise of the underwriters’ option to purchase additional shares).

Our principal executive offices are located at 680 East Swedesford Road, Wayne, Pennsylvania 19087, and our telephone number is (484) 582-5400. We maintain a website at www.sungard.com. The information contained on our website or that can be accessed through our website neither constitutes part of this prospectus nor is incorporated by reference herein.

 

 

6


Table of Contents

Corporate Structure

The following diagram illustrates our corporate structure following the consummation of this offering after giving effect to the Recapitalization, the consummation of this offering and the repayment with proceeds of this offering of indebtedness of SDS, assuming no exercise by the underwriters of their option to purchase additional shares.

 

LOGO

 

(1) Our senior secured revolving credit facility provides for up to $600 million in borrowings and matures on March 8, 2018. At March 31, 2015, no borrowings were outstanding and we had $593 million of availability under the revolving facility after giving effect to certain outstanding letters of credit. See “Description of Indebtedness—Senior Secured Credit Facilities.”
(2) As of March 31, 2015, we had $400 million of tranche C term loans and $1,918 million of tranche E term loans outstanding. See “Description of Indebtedness—Senior Secured Credit Facilities.”
(3) As of March 31, 2015, our Receivables Facility has a facility limit of $200 million consisting of a term loan commitment of $140 million and a revolving commitment of $60 million. See “Description of Indebtedness—Receivables Facility.”

 

 

7


Table of Contents

The Offering

 

Common stock offered

             shares.

 

Underwriters’ option to purchase additional shares of common stock

             shares.

 

Common stock to be outstanding immediately after this offering

             shares (or              shares if the underwriters exercise in full their option to purchase additional shares).

 

Use of proceeds

We estimate that the net proceeds to us from this offering, after deducting underwriting discounts and commissions payable by us, will be approximately $         million (or approximately $         million, if the underwriters exercise in full their option to purchase additional shares), based on the assumed initial public offering price of $         per share, which is the mid-point of the range set forth on the cover page of this prospectus. For sensitivity analysis as to the offering price and other information, see “Use of Proceeds.”

 

  We intend to use the net proceeds from this offering to repay $         million in aggregate principal amount of our indebtedness. See “Use of Proceeds.”

 

Risk factors

See “Risk Factors” beginning on page 14 and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.

 

Dividend policy

After completion of this offering, we do not intend to pay cash dividends on our common stock. We may, in the future, decide to pay dividends on our common stock, subject to the discretion of our board of directors and other factors. In the event we decide to pay dividends in the future, our ability to pay dividends will be limited by covenants in our senior secured credit facilities and the indentures governing our senior notes. See “Dividend Policy” and “Description of Indebtedness.”

 

             ticker symbol

“                    ”

 

Conflicts of interest

Affiliates of Goldman, Sachs & Co., an underwriter in this offering, will beneficially own in excess of 10% of our issued and outstanding common stock. Therefore, Goldman, Sachs & Co. is deemed to have a “conflict of interest” under Rule 5121(f)(5)(B) of the Financial Industry Regulatory Authority, Inc. (“FINRA”). Accordingly, this offering will be conducted in accordance with Rule 5121, which requires, among other things, that a “qualified independent underwriter” participate in the preparation of, and exercise the usual standards of “due diligence” with respect to, the registration statement and this prospectus. J.P. Morgan Securities LLC has agreed to act as a qualified independent underwriter for this offering. See “Underwriting (Conflicts of Interest)—Conflicts of Interest.”

 

 

8


Table of Contents

Unless we indicate otherwise or the context otherwise requires, all information in this prospectus:

 

    assumes consummation of the Recapitalization (see “Recapitalization”);

 

    gives effect to the        -for-one stock split of our common stock which will occur prior to this offering;

 

    assumes an initial public offering price of $         per share, the mid-point of the initial public offering range indicated on the cover of this prospectus; and

 

    assumes no exercise of the underwriters’ option to purchase additional shares of our common stock.

The number of shares of our common stock to be outstanding after this offering is based on the number of shares of our common stock outstanding as of                     , 2015, and excludes:

 

                 shares of common stock issuable upon exercise of stock options outstanding as of                     , 2015 at a weighted average exercise price of $         per share under our equity incentive plans; and

 

    shares of common stock reserved as of                      , 2015 for future issuance under our equity incentive plans.

 

 

9


Table of Contents

Summary Historical Consolidated Financial Data

The table below presents our summary historical consolidated financial data as of the dates and for the periods indicated. We have derived the summary historical consolidated financial data as of December 31, 2013 and 2014 and for each of the years ended December 31, 2012, 2013 and 2014 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the summary historical consolidated financial data as of December 31, 2012 from our audited historical financial statements which are not included in this prospectus. We have derived the summary historical consolidated financial data as of March 31, 2014 from our unaudited consolidated financial statements which are not included in this prospectus, and we have derived the summary historical consolidated financial data as of March 31, 2015 and for each of the three months ended March 31, 2014 and March 31, 2015 from our unaudited consolidated financial statements included elsewhere in this prospectus, which have been prepared on the same basis as our audited consolidated financial statements.

Our historical results are not necessarily indicative of future operating results. Because the data in this table is only a summary and does not provide all of the data contained in our consolidated financial statements, the information should be read in conjunction with “Selected Historical Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes thereto included elsewhere in this prospectus.

 

     Year ended December 31,     Three months ended
March 31,
 
     2012     2013     2014         2014             2015      
(dollars in millions, except per share amounts)                      (unaudited)  

Consolidated statements of income (loss):

          

Revenue

   $ 2,808      $ 2,761      $ 2,809      $ 653      $ 671   

Costs and expenses:

          

Cost of sales and direct operating

     1,082        1,045        1,098        269        268   

Sales, marketing and administration

     643        634        667        168        152   

Product development and maintenance

     422        392        376        99        86   

Depreciation

     96        104        107        24        29   

Amortization of acquisition-related intangible assets

     217        182        136        43        21   

Trade name impairment charges

     —          —          339        339        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  2,460      2,357      2,723      942      556   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

  348      404      86      (289   115   

Other income (expense):

Interest income

  1      1      1      —        —     

Interest expense and amortization of deferred financing fees

  (360   (326   (291   (74   (71

Loss on extinguishment of debt

  (82   (6   (61   (61   —     

Other income (expense)

  1      (2   —        —        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense)

  (440   (333   (351   (135   (71
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

  (92   71      (265   (424   44   

Benefit from (provision for) income taxes

  49      (26   57      101      (18
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

  (43   45      (208   (323   26   

Income (loss) from discontinued operations, net of tax(1)

  (23   17      (14   (17   2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  (66   62      (222   (340   28   

Income attributable to non-controlling interests

  (251   (169   (174   (50   (43
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to SunGard

$ (317 $ (107 $ (396 $ (390 $ (15
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

10


Table of Contents
     Year ended December 31,     Three months ended
March 31,
 
     2012     2013     2014         2014             2015      
(dollars in millions, except per share amounts)                      (unaudited)  

Pro forma income (loss) per share—continuing operations(2):

          

Basic

          

Fully diluted

          

Pro forma weighted average number of shares—continuing operations(2):

          

Basic

          

Fully diluted

          

Consolidated statements of cash flows data:

          

Net cash provided by (used in):

          

Operating activities:

          

Continuing operations

   $ 287      $ 421      $ 332      $ 86      $ 154   

Discontinued operations

     (43     324        33        36        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  244      745      365      122      154   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investing activities:

Continuing operations

  (136   (112   (147   (28   (32

Discontinued operations

  1,597      (146   7      5      1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  1,461      (258   (140   (23   (31
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities:

Continuing operations

  (2,036   (324   (1,355   (1,338   (4

Discontinued operations

  (3   (2   887      887      —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  (2,039   (326   (468   (451   (4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated balance sheet data (at period end):

Cash and cash equivalents(3)

$ 535    $ 675    $ 447    $ 355    $ 555   

Total assets

  10,018      9,778      6,511      6,452      6,389   

Total debt(4)

  6,658      6,384      4,669      4,671      4,670   

Total liabilities

  9,328      8,979      6,322      6,302      6,236   

Total equity

  614      695      92      70      57   

Other financial data (continuing operations):

Capital expenditures(5)

$ 97    $ 111    $ 143    $ 28    $ 28   

Cash interest expense(6)

  323      288      272      67      67   

Adjusted EBITDA(7)

  749      766      765      145      175   

 

(1) In January 2012, we sold our Higher Education business (“HE”) and in July 2012 we sold one FS subsidiary. We recorded a $571 million gain on the sales. As a result of the HE sale, in 2012, we paid approximately $400 million in income tax payments. In January 2014, we sold two small businesses within our FS segment for €27 million paid at closing, €9 million to be paid within three years (“deferred purchase price”) and €2 million to be paid upon the successful assignment of certain customer contracts. The deferred purchase price is unconditional and is secured by a bank guarantee. During the first quarter of 2015, we successfully assigned certain of these customer contracts and recognized a $2 million gain in discontinued operations. On March 31, 2014, we completed the AS Split-Off. These businesses are included in our financial results as discontinued operations for all periods presented.
(2) Reflects the Recapitalization and the             -for-one stock split.
(3) Cash and cash equivalents excludes cash related to discontinued operations of $11 million and $31 million at December 31, 2012, and 2013, respectively.

 

 

11


Table of Contents
(4) Reflects the total debt of the Company, which has decreased over time due to repayments from the net proceeds of businesses we sold and from the split-off of the AS business, as well as repayments from excess cash flows and available cash. Total debt excludes debt related to discontinued operations of $4 million and $8 million at December 31, 2012, and 2013, respectively.
(5) Capital expenditures represent cash paid for property, equipment and software, as well as the capitalization of internal costs related to software development initiatives.
(6) Cash interest expense is net of cash interest income and does not include any amortization of capitalized debt issuance cost, accretion of bond discounts, accretion of discounted liabilities, or loss on sale of receivables.
(7) Our primary non-GAAP measure is Adjusted EBITDA, whose corresponding GAAP measure is net income (loss). We define Adjusted EBITDA as net income (loss) less income (loss) from discontinued operations, income taxes, loss on extinguishment of debt, interest expense and amortization of deferred financing fees, depreciation (including the amortization of capitalized software), amortization of acquisition-related intangible assets, trade name and goodwill impairment charges, severance and facility closure charges, stock compensation expense, management fees from our Sponsors, and certain other costs.

We believe Adjusted EBITDA is an effective tool to measure our operating performance since it excludes non-cash items and certain variable charges. We use Adjusted EBITDA extensively to measure the financial performance of SunGard and its reportable segments, and also to report our results to our board of directors. We use a similar measure, as defined in our senior secured credit agreement, for purposes of computing our debt covenants.

While Adjusted EBITDA and similar measures are frequently used as measures of operations and the ability to meet debt service requirements, these terms are not necessarily comparable to other similarly titled captions of other companies due to the potential inconsistencies in the method of calculation. Adjusted EBITDA does not reflect the impact of earnings or charges resulting from matters that we may consider not to be indicative of our ongoing operations. In particular, our definition of Adjusted EBITDA adds back certain noncash, extraordinary or unusual charges that are deducted in calculating net income (loss). However, these are expenses that may recur, vary greatly and are difficult to predict. Adjusted EBITDA should not be considered as an alternative to cash flows from operating activities, as a measure of liquidity or as an alternative to operating income or net income as indicators of operating performance.

 

 

12


Table of Contents

The following table presents a reconciliation of Adjusted EBITDA, a non-GAAP measure, to net income (loss), which is the nearest comparable GAAP measure.

 

     Year ended
December 31,
     Three months ended
March 31,
 
     2012      2013      2014          2014              2015      
(dollars in millions)                         (unaudited)  

Net income (loss)

   $ (66    $ 62       $ (222    $ (340    $ 28   

Income (loss) from discontinued operations, net of tax

     (23      17         (14      (17      2   

Benefit from (provision for) income taxes

     49         (26      57         101         (18

Loss on extinguishment of debt(a)

     (82      (6      (61      (61      —     

Interest expense and amortization of deferred financing fees

     (360      (326      (291      (74      (71

Other income (expense), net

     2         (1      1         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Operating income (loss)

  348      404      86      (289   115   

Depreciation

  96      104      107      24      29   

Amortization of acquisition-related intangible assets

  217      182      136      43      21   

Trade name impairment charge

  —        —        339      339      —     

Restructuring charges(b)

  42      17      27      5      2   

Stock compensation expense

  31      39      42      9      10   

Management fees

  9      8      9      2      2   

Other costs (included in operating income)(c)

  6      12      19      12      (4
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

$ 749    $ 766    $ 765    $ 145    $ 175   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  (a) Loss on extinguishment of debt includes in 2012 the write-off of deferred financing fees associated with the January 2012 repayment of $1.22 billion of our U.S. Dollar-denominated term loans, the April 2012 retirement of $500 million, 10.625% senior notes due 2015, the December 2012 retirement of $1 billion, 10.25% senior subordinated notes due 2015 and the December 2012 repayment of $217 million of U.S. Dollar-denominated term loans. Loss on extinguishment of debt for 2014 primarily includes (i) a $36 million loss associated with the exchange of SpinCo Notes for SunGard Notes and (ii) the write-off of deferred financing fees associated with (a) the repayment of $1.005 billion of term loans and the retirement of $389 million of senior notes due 2018, both resulting from the AS Split-Off (see Note 1 and Note 5 of Notes to Consolidated Financial Statements), (b) the $250 million reduction of the revolving credit facility and (c) the repayment of $60 million of the accounts receivable facility term loans.
  (b) Restructuring charges includes severance and related payroll taxes and reserves to consolidate certain facilities.
  (c) Other costs include strategic initiative expenses, certain expenses associated with acquisitions made by the Company, and foreign currency gains and losses.

 

 

13


Table of Contents

RISK FACTORS

An investment in our common stock involves risk. You should carefully consider the following risks as well as the other information included in this prospectus, including “Selected Historical Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Special Note Regarding Forward-Looking Statements” and our financial statements and related notes, before investing in our common stock. Any of the following risks could materially and adversely affect our business, financial condition or results of operations. However, the selected risks described below are not the only risks facing us. Additional risks and uncertainties not currently known to us or those we currently view to be immaterial may also materially and adversely affect our business, financial condition or results of operations. In such a case, the trading price of our common stock could decline and you may lose all or part of your investment in our Company.

Risks Related to Our Business

Our business depends largely on the economy and financial markets, and a slowdown or downturn in the economy or financial markets could adversely affect our business and results of operations.

When there is a slowdown or downturn in the economy, a drop in stock market levels or trading volumes, or an event that disrupts the financial markets, our business and financial results may suffer for a number of reasons. Customers may react to worsening conditions by reducing their capital expenditures in general or by specifically reducing their IT spending. In addition, customers may curtail or discontinue trading operations, delay or cancel IT projects, or seek to lower their costs by renegotiating vendor contracts. For example, during and following the financial crisis in 2008 and 2009, a number of our large customers declared bankruptcy, were acquired and/or significantly reduced their IT budgets. As a result, our business and results of operations were adversely affected. Moreover, competitors may respond to market conditions by lowering prices and attempting to lure away our customers to lower cost solutions. If any of these circumstances remain in effect for an extended period of time, there could be a material adverse effect on our financial results. Because our financial performance tends to lag behind fluctuations in the economy, our recovery from any particular downturn in the economy may not occur until after economic conditions have generally improved.

Our business depends to a significant degree on the financial services industry, and a weakening of, or further consolidation in, or new regulations affecting, the financial services industry could adversely affect our business and results of operations.

Because our customer base is concentrated in the financial services industry, our business is largely dependent on the health of that industry. When there is a general downturn in the financial services industry, or if our customers in that industry experience financial or business problems, including bankruptcies, our business and financial results may suffer. If financial services firms continue to consolidate, there could be a material adverse effect on our business and financial results. When a customer merges with a firm using its own internally-developed solution or another vendor’s solution, it could decide to consolidate on a non-SunGard system, which could have an adverse effect on our financial results.

To the extent newly adopted regulations, such as Dodd-Frank and Basel III, negatively impact the business, operations or financial condition of our customers, our business and financial results could be adversely affected. For example, new regulations governing our customers could result in significant expenditures that could cause them to reduce their IT spending, renegotiate vendor contracts or cease or curtail certain operations. Furthermore, we could be required to invest a significant amount of time and resources to comply with additional regulations or to modify the manner in which we provide products and services to our customers; and such regulations could limit how much we can charge for our services. We may not be able to update our existing products and services, or develop new ones at all or in a timely manner, to satisfy our customers’ needs. Any of these events, if realized, could have a material adverse effect on our business and financial results.

 

14


Table of Contents

Catastrophic events may disrupt or otherwise adversely affect the markets in which we operate, our business and our profitability.

Our business may be adversely affected by a war, terrorist attack, natural disaster or other catastrophe. A catastrophic event could have a direct negative impact on us or an indirect impact on us by, for example, affecting our customers, the financial markets or the overall economy. The potential for a direct impact is due primarily to our significant investment in our infrastructure. Although we maintain redundant facilities and have contingency plans in place to protect against both man-made and natural threats, it is impossible to fully anticipate and protect against all potential catastrophes. Despite our preparations, a security or data breach, cyber-attack, criminal act, military action, power or communication failure, flood, severe storm or the like could lead to service interruptions and data losses for customers, disruptions to our operations, or damage to our important facilities. If any of these events happen, we may be exposed to unexpected liability, our customers may leave, our reputation may be tarnished, and there could be a material adverse effect on our business and financial results.

Data security, confidentiality and integrity are critically important to our business, and actual or attempted breaches of security, unauthorized disclosure of information, denial of service attacks or the perception that personal and/or other sensitive or confidential information in our possession is not secure could result in a material loss of business, substantive legal liability or significant harm to our business.

Data protection and security has become a significant issue in the United States and in many other countries where we offer our solutions or may offer them in the future. Security breaches, computer malware and computer hacking attacks have become more prevalent in our industry and may occur in the future on our systems or those of our information technology vendors. We receive, collect, process, use, store and transmit customer data (some of which is critical to their business operations) and other proprietary information of, or on behalf of, our customers, employees, suppliers and other third parties, including personally identifiable and other sensitive and confidential information. For example, our capital markets systems maintain account and trading information for our customers and their clients, and our wealth management and insurance systems maintain investor account information for retirement plans, insurance policies and mutual funds. This data is often accessed by us and our clients through transmissions over public and private networks, including the Internet. The secure transmission of such information over the Internet and other mechanisms is essential to maintain confidence in our IT systems. We have implemented security measures, technical controls and contractual precautions designed to protect the security, integrity and confidentiality of the information and data that we receive, collect, process, use, store or transmit. However, there is no guarantee that, despite our efforts, inadvertent or unauthorized use or disclosure will not occur or that third parties will not gain unauthorized access to this information. Controls on access to our systems and databases may be compromised as a result of external criminal activity, human or systems failures, or fraud or malice on the part of employees or third parties.

We and our vendors may be unable to anticipate techniques used to obtain unauthorized access or sabotage systems or to implement adequate preventative or mitigation measures because these techniques change frequently, generally are not identified until they are launched against a target, and may originate from less regulated and remote areas around the world or be sponsored by governments for the purpose of attacking U.S. economic interests. While we maintain insurance that covers certain data breaches, we may be uninsured for certain other risks or may not maintain sufficient insurance coverage to compensate for all potential liability. While we select our third-party service providers with care, diligence their policies and practices regarding data protection, and obligate them to implement and maintain security measures to protect our customer, employee and other third-party data, we cannot assure you that any of our third-party service providers with access to our or our clients’ and/or employees’ personally identifiable and other sensitive or confidential information will maintain appropriate policies and practices regarding data protection in compliance with all applicable laws or that they will not experience data security breaches and cyber-attacks or attempts thereof, which could have a corresponding effect on our business.

While we have not been the victim of any data privacy or security-related incidents that have had a material impact on our operations or financial condition, we have experienced such incidents as denial of service attempts,

 

15


Table of Contents

malware infections, phishing attempts, and other attempts at compromising our information technology that are typical for a company of our size that operates in the global financial marketplace. However, a security breach of or cyber-attack on our systems or our vendors’ systems, with or without resultant data loss, could result in unauthorized disclosure, misuse, or loss of personally identifiable or other confidential or private information which could result in costly legal claims and litigation, indemnity obligations, regulatory fines and penalties, and other liabilities. Additionally, a security breach or attempt thereof could result in the loss of clients or the inability to attract new clients, additional costs associated with repairing any system damage, incentives offered to clients or other business partners to maintain business relationships after a breach, and implementation of measures to prevent future breaches. Finally, data protection concerns, whether valid or not valid, may inhibit market adoption of our solutions, particularly in foreign countries.

If we fail to comply with current or future laws or regulations governing the collection, disclosure, use and confidentiality of personally identifiable information, our reputation and business could be adversely affected.

The protection of personally identifiable information that is collected, stored, maintained, received or transmitted electronically is a major issue in our industry. Many federal, state and foreign government bodies and agencies have adopted or are considering adopting laws and regulations regarding the collection, use, disclosure, control, security and deletion of personally identifiable information. In the United States, these include, without limitation, laws and regulations promulgated by states, as well as rules and regulations promulgated under the authority of the Federal Trade Commission and federal financial regulatory bodies. Internationally, most of the jurisdictions in which we operate have established their own data protection legal frameworks, many of which impose greater obligations on us and our customers. Many of these obligations are updated frequently and require ongoing monitoring. In addition to government regulation, data protection advocacy and industry groups may propose new and different self-regulatory standards that either legally or contractually apply to us.

While we strive to comply with all applicable data protection laws and regulations, as well as our own posted policies and industry best practices, the regulatory framework for data protection issues worldwide is currently evolving, is not uniform and is likely to remain uncertain for the foreseeable future. We may incur significant costs in monitoring and complying with the multitude of evolving laws and regulations relating to data protection, and we cannot provide assurances with regard to how governmental regulation and other legal obligations related to data protection will be interpreted, enforced or applied to our operations. Any failure or perceived failure by us to comply with applicable laws, regulations and standards may result in threatened or actual proceedings, actions and public statements against us by government entities, private parties, consumer advocacy groups or others, which could have a material adverse effect on our business. Complying with these numerous and complex regulations is expensive and difficult, and failure to comply could result in regulatory scrutiny, fines and civil liability. Additionally, concerns about our practices with regard to the collection, use, disclosure or security of sensitive data, even if unfounded, could damage our reputation and harm our business.

Our business and operating results could be adversely affected if we experience business interruptions, errors or failure in connection with our or third-party information technology and communication systems and other software and hardware products used in connection with our business, or more generally, if the third-party vendors we rely upon are unwilling or unable to provide the services we need to effectively operate our business.

Our ability to provide timely and accurate client solutions and services depends on the efficient and uninterrupted operation of our information technology and communications systems and other software and hardware used in connection with our business, whether owned by us or our vendors. Despite any precautions we may take, our systems, software and hardware and those of our vendors could be exposed to damage or interruption from circumstances beyond our or their control, such as fire, natural disasters, systems failures, power outages, data protection breaches and other cyber-attacks, terrorism, energy loss, telecommunications failure, and computer viruses. An operational error, delay, failure or outage in our information technology and communication systems, software and hardware or those or our vendors could result in loss of clients, damage to client relationships, reduced revenue and profits, refunds of client charges and damage to our reputation, and may

 

16


Table of Contents

result in additional expense to repair or replace damaged equipment and remedy data loss or corruption resulting from the interruption. Although we have taken steps to prevent system failures and have back-up systems and procedures to prevent or reduce disruptions, such steps may not prevent an interruption of services and our disaster recovery planning may not be sufficient to account for all contingencies. Additionally, our insurance may not adequately compensate us for all losses or failures that may occur. The occurrence of any one of the above events could have a material adverse effect on our business, financial condition, results of operation and reputation.

In addition, we generally depend on a number of third parties, both in the United States and internationally, to supply elements of our systems, computers, research and market data, connectivity, communication network infrastructure, other equipment and related support and maintenance. We cannot be certain that any of these vendors will be able to continue providing these services to effectively meet our evolving needs. If our vendors fail to meet their obligations, provide poor or untimely service, or we are unable to make alternative arrangements for the provision of these services, we may in turn fail to provide our services or to meet our obligations to our customers, and our business, financial condition and our operating results could be materially harmed.

Our results may fluctuate from period to period because of the lengthy and unpredictable sales cycle for our software, changes in our mix of licenses and services, activity by competitors, and customer budgeting or operations requirements or renewal cycles.

Our operating results may fluctuate from period to period and be difficult to predict in a particular period due to the timing and magnitude of software license sales and other factors. We offer a number of our software solutions on a license basis, which means that the customer has the right to run the software on its own computers. The customer usually makes a significant up-front payment to license software, which we generally recognize as revenue when the license contract is signed and the software is delivered. The size of the up-front payment often depends on a number of factors that are different for each customer, such as the number of customer locations, users or accounts. As a result, the sales cycle for a software license may be lengthy and take unexpected turns. Further, our customers’ business models are shifting away from paying upfront license fees to paying periodic rental fees for services. Thus, it is difficult to predict when software sales will occur or how much revenue they will generate. Since there are few incremental costs associated with software sales, our operating results may fluctuate from quarter to quarter and year to year due to the timing and magnitude of software sales. In addition, as more of our revenue shifts to SaaS, cloud, BPaaS and services, the need to keep pace with rapid technology changes becomes more acute. Our results may also vary as a result of pricing pressures, increased cost of equipment, the evolving and unpredictable markets in which our products and services are sold, changes in accounting principles, and competitors’ new products or services.

In addition, there are a number of other factors that could cause our sales and results of operation to fluctuate from period to period, including:

 

    customers periodically renew or upgrade their installed base of our products, which trigger buying cycles for current or new versions of our products and our revenue generally fluctuates with these refresh cycles as a result;

 

    our ability to attract new and retain existing customers, particularly large customers;

 

    the budgeting cycles and purchasing practices of customers, particularly large customers;

 

    changes in customer, distributor or reseller requirements or market needs;

 

    deferral of orders from customers in anticipation of new solutions or offerings announced by us or our competitors or otherwise anticipated by the market;

 

    our ability to successfully expand our business domestically and internationally; and

 

    insolvency or credit difficulties confronting our customers, which could adversely affect their ability to purchase or pay for our solutions.

 

17


Table of Contents

Rapid changes in technology and our customers’ businesses could adversely affect our business and financial results.

Our business may suffer if we do not successfully adapt our products and services to changes in technology and changes in our customers’ businesses. These changes can occur rapidly and at unpredictable intervals and we may not be able to respond adequately. If we do not successfully update and integrate our products and services, including our SaaS and cloud offerings, to adapt to these changes, or if we do not successfully develop new products and services needed by our customers to keep pace with these changes, then our business and financial results may suffer. Our ability to keep up with technology and business changes is subject to a number of risks and we may find it difficult or costly to, among other things:

 

    update our products and services and to develop new products fast enough to meet our customers’ needs;

 

    make some features of our products and services work effectively and securely over the Internet;

 

    integrate more of our solutions;

 

    update our products and services to keep pace with business, regulatory and other developments in the financial services industry, where many of our customers operate; and

 

    update our services to keep pace with advancements in hardware, software and telecommunications technology.

Some technological changes may render some of our products and services less valuable or eventually obsolete. In addition, because of ongoing, rapid technological changes, the useful lives of some technology assets have become shorter and customers are therefore replacing these assets more often. As a result, our customers are increasingly expressing a preference for contracts with shorter terms, which could make our revenue less predictable in the future. Furthermore, we may be required to make significant upfront investments in developing new technology without any assurance that we will be able to generate sufficient revenue from the developed products and technology to offset the expense. In addition, rapid changes in our upfront license sales model could result in a prolonged downward trend in our high margin software license revenue. We may lose the ability to recognize certain license sales upfront, which could have an adverse effect on our financial results.

Our securities brokerage operations are highly regulated and subject to risks that are not encountered in our other businesses.

One of our subsidiaries is an SEC registered broker-dealer in the U.S. and another is authorized by the Financial Conduct Authority to conduct certain regulated business in the U.K. Domestic and foreign regulatory and self-regulatory organizations, such as the SEC, the Financial Industry Regulatory Authority, and the U.K. Financial Conduct Authority can, among other things, fine, censure, issue cease-and-desist orders against, and suspend or expel a broker-dealer or its officers or employees for failure to comply with the many laws and regulations that govern brokerage activities. Such sanctions may arise out of currently-conducted activities or those conducted in prior periods. Our ability to comply with these laws and regulations is largely dependent on our establishment, maintenance, and enforcement of an effective brokerage compliance program. Failure to establish, maintain, and enforce the required brokerage compliance procedures, even if unintentional, could subject us to significant losses, lead to disciplinary or other actions, and tarnish our reputation. Regulations affecting the brokerage industry may change, which could adversely affect our financial results.

We are exposed to certain risks relating to the execution services provided by our brokerage operations to our customers and counterparties, which include other broker-dealers, active traders, hedge funds, asset managers, and other institutional and non-institutional clients. These risks include, but are not limited to, customers or counterparties failing to pay for or deliver securities, trading errors, the inability or failure to settle trades, and trade execution system failures. In our other businesses, we generally can disclaim liability for trading

 

18


Table of Contents

losses that may be caused by our software, but in our brokerage operations, we may not be able to limit our liability for trading losses or failed trades even when we are not at fault. As a result, we may suffer losses that are disproportionately large compared to the relatively modest profit contributions of our brokerage operations.

If we fail to comply with government regulations in connection with our business or by providing technology services to certain financial institutions, our business and results of operations may be adversely affected.

Increasingly, regulators are scrutinizing more closely banking organizations’ relationships with third-party service providers, including providers of data processing services. We may be affected indirectly by the scrutiny that such regulators exercise over the relationships that banking organizations have with third-party service providers, such as us. Because we act as a third-party service provider to financial institutions and provide mission-critical applications for many financial institutions that are regulated by one or more member agencies of the Federal Financial Institutions Examination Council (“FFIEC”), we are subject to examination by the member agencies of the FFIEC. More specifically, we are a Multi-Regional Data Processing Servicer of the FFIEC because we provide mission critical applications for financial institutions from several data centers located in different geographic regions. As a result, the FFIEC conducts periodic reviews of certain of our operations in order to identify existing or potential risks associated with our operations that could adversely affect the financial institutions to whom we provide services, evaluate our risk management systems and controls, and determine our compliance with applicable laws that affect the services we provide to financial institutions. In addition to examining areas such as our management of technology, data integrity, information confidentiality and service availability, the reviews also assess our financial stability. Our high levels of debt increase the risk of an FFIEC agency review determining that our financial stability has been weakened. A sufficiently unfavorable review from the FFIEC could result in our financial institution customers not being allowed to use our technology services, or electing not to renew their contracts with us based on such unfavorable review.

If we fail to comply with any regulations applicable to our business, we may be exposed to unexpected liability and/or governmental proceedings, our customers may leave, our reputation may be tarnished, and there could be a material adverse effect on our business and financial results. In addition, the future enactment of more restrictive laws or rules on the federal or state level, or, with respect to our international operations, in foreign jurisdictions on the national, provincial, state or other level, could require us to make additional compliance investments, which would have an adverse impact on business and financial results.

If we are unable to retain or attract customers, our business and financial results will be adversely affected.

If we are unable to keep existing customers satisfied, sell additional products and services to existing customers or attract new customers, including large enterprise customers, then our business and financial results may suffer. A variety of factors could affect our ability to successfully retain and attract customers in general, including the level of demand for our products and services, the level of customer spending for information technology, the level of competition from customers that develop their own solutions internally and from other vendors, the quality of our customer service, our ability to update our products and develop new products and services needed by customers, and our ability to integrate and manage acquired businesses. Sales to large enterprise customers involve additional challenges that may not be present, or are present to a lesser extent, with sales to smaller customers. These challenges include preexisting relationships with larger, entrenched solution providers who have relationships with key decision makers, demand for lower prices or extended warranties, more stringent requirements in our support service contracts, increased penalties for failures to meet support requirements and longer sales cycles with multiple approval requirements. Additionally, for other potential clients of our products and services, switching from one vendor (or from an internally-developed system) to a new vendor is a significant undertaking. Many potential clients perceive potential disadvantages such as business disruption and conversion risk. While we may offer enhanced functionality and competitive solutions or services, if we are unable to overcome potential clients’ reluctance to change vendors our results may be impacted.

A substantial portion of our revenue is derived from the sale of our products and services under fixed-term contracts. We do not have a unilateral right to extend these contracts when they expire. In addition, our

 

19


Table of Contents

customers periodically refresh their installed base of products and services, replacing older versions of products that reach the end of their useful life and are no longer supported under our service contracts with the latest products. These refresh cycles trigger buying cycles for new versions of our products, which are supported under our service contracts and typically offer greater capacity and additional features. A refresh cycle also creates an opportunity for our competitors to try to displace our existing products and services for our customers, who may be more inclined to consider other vendor products and services when they otherwise have to replace our existing products and services that have reached the end of their useful life. The extent to which customers decide to refresh by purchasing our new products and services, as opposed to purchasing products and services from our current or future competitors, may have a material adverse effect on our business and financial results. Revenue from our broker-dealer businesses is not subject to minimum or ongoing contractual commitments on the part of brokerage customers. If customers cancel or refuse to renew their contracts, or if customers reduce the usage levels or asset values under their contracts, there could be a material adverse effect on our business and financial results.

We operate in an intensely competitive business environment and if we are unable to successfully compete our results of operations and financial condition may be adversely affected.

The markets for our services and products continue to evolve and are intensely competitive. We compete with numerous companies that provide similar services and products. In certain markets that we serve, some of our competitors may offer a wider range of products or services, have broader name recognition, and have larger customer bases than we do. Additionally, certain of our products and services compete with our existing and potential clients’ in-house capacity to develop key applications. Although we believe that our products and services have established certain competitive advantages, our competitors may be able to respond more quickly to new or evolving opportunities, technologies and client requirements, and may be able to undertake more extensive marketing activities, offer more attractive terms to clients and implement more aggressive pricing policies. We also expect that the markets in which we compete will continue to attract new competitors and technologies, including foreign providers of similar services and products to ours. There can be no assurances that we will be able to compete successfully with current or future competitors. If we fail to compete effectively, our business, results of operation and financial condition could be adversely affected.

If we fail to retain key employees, our business may be harmed.

Our success depends on the skill, experience and dedication of our employees. If we are unable to retain and attract sufficiently experienced and capable personnel, especially in product development, sales and management, our business and financial results may suffer. For example, if we are unable to retain and attract a sufficient number of skilled technical personnel, our ability to develop high quality products and provide high quality customer service may be impaired. Experienced and capable personnel in the technology industry remain in high demand, and there is continual competition for their talents. When talented employees leave, we may have difficulty replacing them, and our business may suffer. There can be no assurance that we will be able to successfully retain and attract the personnel that we need.

We are subject to the risks of doing business internationally.

A portion of our revenue is generated outside the United States, primarily from customers located in Europe. Over the past few years we have expanded our operations in certain emerging markets in Asia, Africa, Europe, the Middle East and South America. Because we sell our services outside the United States, our business is subject to risks associated with doing business internationally. Accordingly, our business and financial results could be adversely affected due to a variety of factors, including:

 

    changes in a specific country or region’s political and cultural climate or economic condition, including change in governmental regime;

 

    unexpected or unfavorable changes in foreign laws, regulatory requirements and related interpretations;

 

    difficulty of effective enforcement of contractual provisions in local jurisdictions;

 

20


Table of Contents
    inadequate intellectual property protection in foreign countries;

 

    trade-protection measures, import or export licensing requirements such as Export Administration Regulations promulgated by the U.S. Department of Commerce and fines, penalties or suspension or revocation of export privileges;

 

    trade sanctions imposed by the United States or other governments with jurisdictional authority over our business operations;

 

    the effects of applicable and potentially adverse foreign tax law changes;

 

    significant adverse changes in foreign currency exchange rates;

 

    longer accounts receivable cycles;

 

    managing a geographically dispersed workforce;

 

    difficulties associated with repatriating cash in a tax-efficient manner; and

 

    compliance with the United States Foreign Corrupt Practices Act, or FCPA, and the Office of Foreign Assets Control regulations, particularly in emerging markets.

In foreign countries, particularly in those with developing economies, certain business practices may exist that are prohibited by laws and regulations applicable to us, such as the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and other anti-corruption laws. Although our policies and procedures require compliance with these laws and are designed to facilitate compliance with these laws, our employees, contractors and agents may take actions in violation of applicable laws or our policies. Any such violation, even if prohibited by our policies, could have a material adverse effect on our business and reputation.

Our acquisitions may not be successful and we may not be able to successfully integrate and manage acquired businesses.

Generally, we seek to acquire businesses that broaden our existing product lines and service offerings and expand our geographic reach. There can be no assurance that our acquisitions will be successful or that we will be able to identify suitable acquisition candidates and successfully complete acquisitions. In addition, we may finance any future acquisition with debt, which would increase our overall levels of indebtedness and related interest costs. If we are unable to successfully integrate and manage acquired businesses, then our business and financial results may suffer. It is possible that the businesses we have acquired and businesses that we acquire in the future may perform worse than expected, be subject to an adverse litigation outcome or prove to be more difficult to integrate and manage than expected. If that happens, there may be a material adverse effect on our business and financial results for a number of reasons, including:

 

    we may have to devote unanticipated financial and management resources to the acquired businesses;

 

    we may not be able to realize expected operating efficiencies or product integration benefits from our acquisitions;

 

    we may have to write-off goodwill or other intangible assets; and

 

    we may incur unforeseen obligations or liabilities (including assumed liabilities not fully indemnified by the seller) in connection with acquisitions.

We could lose revenue due to “fiscal funding” or “termination for convenience” clauses in certain customer contracts, especially in our PS and K-12 businesses.

Certain of our customer contracts, particularly those with governments and school districts, may be partly or completely terminated by the customer due to budget cuts or sometimes for any reason at all. These types of clauses are often called “fiscal funding” or “termination for convenience” clauses. If a customer exercises one of these clauses, the customer would be obligated to pay for the services we performed up to the date of exercise, but would not have to pay for any further services. In addition, governments and school districts may require contract terms that differ from our standard terms. While we have not been materially affected by exercises of

 

21


Table of Contents

these clauses or other unusual terms in the past, we may be in the future. If customers that collectively represent a substantial portion of our revenue were to invoke the fiscal funding or termination for convenience clauses of their contracts, our future business and results of operations could be adversely affected.

Protection of our intellectual property may be difficult and costly, and if we are unable to protect our proprietary technologies, we could lose one of our competitive advantages and our business could be adversely affected.

Our company’s success depends in part on our ability to protect our proprietary products and services and corresponding intellectual property rights. If we are unable to do so, our business and financial results may suffer. To protect our intellectual property rights, we rely upon a combination of United States and worldwide federal, state and common law intellectual property laws, invention assignment agreements and confidentiality restrictions in contracts with employees, customers, vendors and others, and software security measures. However, effective intellectual property protection is expensive to obtain, develop and maintain, both in terms of initial and ongoing registration or prosecution requirements and the expenses and the costs of defending our rights. We may not be able to successfully secure the intellectual property rights that we apply for worldwide, and our existing intellectual property rights and related registrations may be challenged in the future and could be opposed, invalidated, canceled or narrowed by a third party.

Despite our efforts to protect our intellectual property rights, unauthorized persons may infringe upon or misappropriate such rights or be able to copy, reverse engineer or otherwise use some of our technology. Additionally, our existing confidentiality and/or invention assignment agreements with employees, contractors and others who participate in intellectual property development activities for us could be breached, or we may not have sufficient and adequate agreements with such individuals, in either case potentially resulting in the unauthorized use or disclosure of our trade secrets and other intellectual property rights. Individuals not subject to invention assignment agreements may make adverse ownership claims to our current and future intellectual property. It also is possible that others will develop and market similar or better technology to compete with us, without infringing on our intellectual property rights. Existing United States intellectual property laws may afford only limited protection, and the laws of some foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States. We may need to expend additional resources to defend our intellectual property in foreign countries that do not have effective intellectual property protection and mechanisms for its enforcement. For the foregoing reasons, we may have difficulty protecting our intellectual property rights against third-party infringement, misappropriation, or unauthorized use or disclosures. In the case of any infringement, misappropriation, use, or disclosure, there could be a material adverse effect on the value of our intellectual property rights and on our business and financial results. In addition, litigation may be necessary to protect our intellectual property rights. This type of litigation is often costly and time-consuming, with no assurance of success, and may have an adverse effect on our business and financial condition. Finally, the inability to defend our intellectual property rights in foreign countries could impair our brand or adversely affect the growth of our business internationally.

We may be sued for violating the intellectual property rights of others.

The software industry is characterized by the existence of a large number of trade secrets, copyrights and the growing number of issued patents, as well as frequent litigation based on allegations of infringement or other violations of intellectual property rights. Some of our competitors or other third parties may have been more aggressive than us in applying for or obtaining patent rights for innovative proprietary technologies both in the United States and internationally. We cannot assure you that we are not infringing or violating, and have not infringed or violated, any third-party intellectual property rights, or that we will not be accused of doing so in the future.

As a result of the foregoing, there can be no assurance that in the future third parties will not assert infringement claims against us and preclude us from using a technology in our products or require us to enter into

 

22


Table of Contents

royalty and licensing arrangements on terms that are not favorable to us, or force us to engage in costly infringement litigation. We could be required to incur significant legal fees and other expenses defending such claims regardless of the merits of the claim, to pay substantial monetary damages in the event the claim is determined to be meritorious, to develop comparable non-infringing intellectual property (which may not be possible), to obtain a license on unfavorable or non-commercially reasonable terms or to cease providing the products or solutions that contain the infringing intellectual property. We do not maintain insurance to cover us in the event of such potential liability as it is generally unavailable at a commercially attractive cost. Additionally, our licenses and service agreements with our customers generally provide that we will defend and indemnify them for claims against them relating to our alleged infringement of the intellectual property rights of third parties with respect to our products or services. We may have to defend or indemnify our customers to the extent they are subject to these types of claims. Any of these claims, even if not meritorious, may be difficult and costly to defend, cause product release delays, and may lead to unfavorable judgments or settlements, which could have a material adverse effect on our reputation, business and financial results. They may also divert our attention from operating our company and result in a temporary or permanent inability to use the intellectual property subject to such claims. For these reasons, we may find it difficult or costly to add or retain important features in our products and services.

While we do not believe any of our known current legal proceedings or claims related to the infringement of patent or other intellectual property rights will, individually or in the aggregate, materially adversely affect our financial condition and operating results, the results of such legal proceedings cannot be predicted with certainty. Should we fail to prevail in any of the matters related to infringement of patent or other intellectual property rights of others or should one or more of these matters be resolved against us in the same reporting period, it could have a material adverse effect on our business and financial results.

Some of our products contain “open source” software, and any failure to comply with the terms of one or more of these open source licenses could negatively affect our business.

We use a limited amount of software licensed by its authors or other third parties under so-called “open source” licenses and may continue to use such software in the future. Some of these licenses contain requirements that we make available source code for modifications or derivative works we create based upon the open source software, and that we license such modifications or derivative works under the terms of a particular open source license or other license granting third parties certain rights of further use. By the terms of certain open source licenses, we could be required to release the source code of our proprietary software if we combine our proprietary software with open source software in a certain manner. Additionally, the terms of many open source licenses have not been interpreted by United States or other courts, and there is a risk that these licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to commercialize our products. In addition to risks related to license requirements, usage of open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or controls on origin of the software. We have established processes to help alleviate these risks, including a review process for screening requests from our development organizations for the use of open source, but we cannot be sure that all open source is submitted for approval prior to use in our products. In addition, many of the risks associated with usage of open source cannot be eliminated, and could, if not properly addressed, negatively affect our business.

Defects, design errors or security flaws in our products could harm our reputation and expose us to potential liability.

Most of our products are very complex software systems that are regularly updated. No matter how careful the design and development, complex software often contains errors and defects when first introduced and when major new updates or enhancements are released. If errors or defects are discovered in our current or future products, we may not be able to correct them in a timely manner, if at all. In our development of updates and enhancements to our products, we may make a major design error that makes the product operate incorrectly or

 

23


Table of Contents

less efficiently. The failure of our products to properly perform could result in us and our clients being subjected to losses or liability, including censures, fines, or other sanctions by applicable regulatory authorities, and we could be liable to parties who are financially harmed by those errors. In addition, such errors could cause us to lose revenues, lose clients or damage our reputation.

We may need to expend significant capital resources in order to eliminate or work around errors, defects, design errors or security problems. Any one of these problems in our products may result in the loss of or a delay in market acceptance of our products, the diversion of development resources, a lower rate of license renewals or upgrades and damage to our reputation, and in turn may increase service and warranty costs.

A material weakness in our internal controls could have a material adverse effect on us.

Effective internal controls are necessary for us to provide reasonable assurance with respect to our financial reports and to effectively prevent fraud. If we cannot provide reasonable assurance with respect to our financial reports and effectively prevent fraud, our reputation and operating results could be harmed. Internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Therefore, even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. In addition, projections of any evaluation of effectiveness of internal control over financial reporting to future periods are subject to the risk that the control may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. A material weakness in our internal control over financial reporting could adversely impact our ability to provide timely and accurate financial information. If we are unable to report financial information timely and accurately or to maintain effective disclosure controls and procedures, we could be subject to, among other things, regulatory or enforcement actions by the SEC, any one of which could adversely affect our business prospects.

Unanticipated changes in our income tax provision or the enactment of new tax legislation, issuance of regulations or relevant judicial decisions, as well as unclaimed property audits by governmental authorities, could affect our operating results, profitability or cash flow.

We are subject to income taxes in the United States and many foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. We regularly are under examination by tax authorities. Although we believe our income tax provision is reasonable, the final determination of our tax liability could be materially different from our historical income tax provisions, which could have a material effect on our financial position, results of operations or cash flows. In addition, tax-law amendments in the United States and other jurisdictions could significantly impact how United States multinational corporations are taxed. Although we cannot predict whether or in what form such legislation will pass, if enacted it could have a material adverse effect on our business and financial results. Furthermore, we are subject to unclaimed property (escheat) laws, which require us to turn over to certain governmental authorities the property held by us that has been unclaimed for a specified period of time. We are subject to audit by individual U.S. states with regard to our escheatment practices.

Risks Related to the AS Split-Off

There could be significant liability for us if all or part of the AS Split-Off were determined to be taxable for U.S. federal or state income tax purposes.

At the time of the AS Split-Off, we received opinions from outside tax counsel to the effect, while the matter was not free from doubt, that the AS Split-Off should qualify for tax-free treatment as transactions described in Section 355 and related provisions of the Internal Revenue Code (the “Code”) as well as relevant

 

24


Table of Contents

state income tax authority. Further, with respect to this offering, we expect to receive an opinion from outside tax counsel that this offering and the associated recapitalization should not cause the prior AS Split-Off to fail to qualify for tax-free treatment as transactions described in Section 355 and related provisions of the Code. However, we did not receive a private letter ruling from the Internal Revenue Service (the “Service”) with respect to the AS Split-Off or this offering. Further, there is a risk that the Service, a state taxing authority or a court could conclude that the separation of the Availability Services business from us, through internal spin-offs, certain related transactions and the exchange of a portion of shares of SunGard Capital Corp. II Preferred Stock for all of the shares of Sungard Availability Services Capital, Inc. (“SpinCo”) may not qualify as tax-free transactions. An opinion of tax counsel is not binding on the Service, state taxing authorities or any court and as a result there can be no assurance that a tax authority will not challenge the tax-free treatment of all or part of the AS Split-Off or that, if litigated, a court would not agree with the Service or a state taxing authority. Further, these tax opinions, including the opinion we expect to receive from outside tax counsel regarding this offering and the associated recapitalization, rely on certain facts, assumptions, representations, warranties and covenants from us, SpinCo and from some of our stockholders regarding the past and future conduct of the companies’ respective businesses, share ownership and other matters. If any of the facts, assumptions, representations, warranties and covenants on which the opinions rely is inaccurate or incomplete or not satisfied, the opinions may no longer be valid. Moreover, the Service or a state taxing authority could determine on audit that the AS Split-Off is taxable if it determines that any of these facts, assumptions, representations, warranties or covenants are not correct or have been violated or if it disagrees with one or more conclusions in the opinions or for other reasons.

In addition, actions taken following the AS Split-Off, including certain 50 percent or greater changes by vote or value of our stock ownership or that of SpinCo, may cause the AS Split-Off to be taxable to us. If the AS Split-Off is determined to be taxable, we and possibly our stockholders who participated in the AS Split-Off (the “Legacy Stockholders”) could incur significant income tax liabilities. These tax liabilities could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

Actions taken by SpinCo or its stockholders could cause the AS Split-Off to fail to qualify as a tax-free transaction, and SpinCo may be unable to fully indemnify us for the resulting significant tax liabilities.

Pursuant to the Tax Sharing and Disaffiliation Agreement that we entered into with SpinCo (“Tax Sharing Agreement”), SpinCo is required to indemnify us for certain taxes relating to the AS Split-Off that result from (i) any breach of the representations or the covenants made by SpinCo regarding the preservation of the intended tax-free treatment of the AS Split-Off, (ii) any action or omission that is inconsistent with the representations, statements, warranties and covenants provided to tax counsel in connection with their delivery of opinions to us with respect to the AS Split-Off, and (iii) any other action or omission that was likely to give rise to such taxes when taken, in each case, by SpinCo or any of its subsidiaries. Conversely, if any such taxes are the result of such a breach or certain other actions or omissions by the Company, we would be wholly responsible for such taxes. In addition, if any part of the AS Split-Off fails to qualify for the intended tax-free treatment for reasons other than those for which we or SpinCo would be wholly responsible pursuant to the provisions described above, SpinCo will be obligated to indemnify us for 23% of the liability for taxes imposed in respect of the AS Separation and we would bear the remainder of such taxes. If SpinCo is required to indemnify us for any of the foregoing reasons, SpinCo’s indemnification liabilities could potentially exceed its net asset value and SpinCo may be unable to fully reimburse or indemnify us for our significant tax liabilities arising from the AS Split-Off as provided by the Tax Sharing Agreement.

We might not be able to engage in certain strategic transactions because we have agreed to certain restrictions to comply with U.S. federal income tax requirements for a tax-free split-off.

To preserve the intended tax-free treatment of the AS Split-Off, we must comply with restrictions under current U.S. federal income tax laws for split-offs such as (i) refraining from engaging in certain transactions that would result in a 50 percent or greater change by vote or by value in our stock ownership, (ii) continuing to own

 

25


Table of Contents

and manage our historic businesses and (iii) limiting sales or redemptions of our common stock. If these restrictions and certain others are not followed, the AS Split-Off could be taxable to us and possibly our Legacy Stockholders. These tax liabilities could have a material adverse effect on our business, financial condition, results of operations and cash flows.

In the Tax Sharing Agreement, we (i) represented that we had no plan or intention to take or fail to take any action that would be inconsistent with the representations, statements, warranties and covenants provided to tax counsel in connection with their delivery of opinions to us with respect to the AS Split-Off and related transactions and (ii) covenanted that during the two-year period following the AS Split-Off, which expires on April 1, 2016, we will not, except in certain specified transactions, (a) sell, issue or redeem our equity securities (or those of certain of our subsidiaries) or (b) liquidate, merge or consolidate with another person or sell or dispose of a substantial portion of our assets (or those of certain of our subsidiaries). During this two-year period, we may take certain actions prohibited by these covenants if we provide SpinCo with a ruling from the Service or a favorable opinion of tax counsel or of a nationally recognized accounting firm, reasonably satisfactory to SpinCo, to the effect that these actions should not affect the tax-free nature of the AS Split-Off. Given that this offering is within two years of the AS Split-Off, we expect to receive an opinion from outside tax counsel to the effect that this offering should not adversely affect the tax-free treatment of the AS Split-Off. As mentioned above, we did not receive a private letter ruling from the Service and an opinion of tax counsel is not binding on the Service, state taxing authorities or any court, and as a result there can be no assurance that a tax authority will not challenge the tax-free treatment of the AS Split-Off as a result of this offering.

These restrictions could limit our strategic and operational flexibility, including our ability to make acquisitions using equity securities, finance our operations by issuing equity securities, repurchase our equity securities, raise money by selling assets or enter into business combination transactions.

Risks Related to Our Indebtedness

Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our debt obligations.

As a result of being acquired on August 11, 2005 by our Sponsors and our subsequent refinancings and issuances, we are highly leveraged and our debt service requirements are significant. As of                     , 2015, on an adjusted basis after giving effect to this offering and the proceeds receive therefrom, we would have had total outstanding debt of $         million.

Our high degree of debt-related leverage could have important consequences, including:

 

    making it more difficult for us to make payments on our debt obligations;

 

    increasing our vulnerability to general economic and industry conditions;

 

    requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities;

 

    exposing us to the risk of increased interest rates as certain of our borrowings, including borrowings under our senior secured credit facilities, are at variable rates of interest;

 

    restricting us from making acquisitions or causing us to make non-strategic divestitures;

 

    limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions and general corporate or other purposes; and

 

    limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors who are less highly leveraged.

 

26


Table of Contents

We and our subsidiaries may be able to incur substantial additional indebtedness in the future, subject to the restrictions contained in our senior secured credit agreement and the indentures relating to our senior notes due 2018 and 2020 and senior subordinated notes due 2019. If new indebtedness is added to our current debt levels, the related risks that we now face could intensify.

Our debt agreements contain restrictions that limit our flexibility in operating our business.

Our senior secured credit agreement and the indentures governing our senior notes due 2018 and 2020 and senior subordinated notes due 2019 contain various covenants that limit our ability to engage in specified types of transactions. These covenants limit our ability to, among other things:

 

    incur additional indebtedness or issue certain preferred shares;

 

    pay dividends on, repurchase or make distributions in respect of our capital stock or make other restricted payments;

 

    make certain investments;

 

    sell certain assets;

 

    create liens;

 

    consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and

 

    enter into certain transactions with our affiliates.

In addition, under the senior secured credit agreement, under certain circumstances, we are required to satisfy and maintain a specified financial ratio and other financial condition tests. Our ability to meet the financial ratio and tests can be affected by events beyond our control, and we may not be able to meet the ratio and tests. A breach of any of these covenants could result in a default under the senior secured credit agreement. Upon an event of default under the senior secured credit agreement, the lenders could elect to declare all amounts outstanding to be immediately due and payable and terminate all commitments to extend further credit, which would trigger a cross-default under our indentures. See “Description of Indebtedness.”

If we were unable to repay those amounts, the lenders under the senior secured credit agreement could proceed against the collateral granted to them to secure that indebtedness. We have pledged a significant portion of our assets as collateral under the senior secured credit agreement. If the lenders under the senior secured credit agreement accelerate the repayment of borrowings, we may not have sufficient assets to repay the senior secured credit facilities and our unsecured indebtedness.

Risks Related to this Offering and Ownership of Our Common Stock

Affiliates of our Sponsors will own the majority of the equity interests in us and may have conflicts of interest with us or the holders of our common stock.

Investment funds affiliated with our Sponsors currently control our company interests and a majority of the seats on our board of directors. As a result, our Sponsors have the ability to prevent any transaction that requires the approval of the board of directors regardless of whether our management believe that any such transaction is in our best interests. For example, our Sponsors could collectively cause us to make acquisitions that increase the amount of our indebtedness or to sell assets, or block us from being sold or could cause us to issue additional capital stock or declare dividends. So long as investment funds affiliated with our Sponsors continue to own a significant amount of our equity interests or otherwise control a majority of our board of directors, the Sponsors will continue to be able to effectively control our decisions. In addition, the Sponsors have no obligation to provide us with any additional debt or equity financing.

The Sponsors are in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us or that supply us with goods and

 

27


Table of Contents

services. The Sponsors may also pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. See “Description of Capital Stock—Conflicts of Interest.” Holders of our common stock should consider that the interests of the Sponsors may differ from their interests in material respects.

We will be a “controlled company” within the meaning of the             rules and the rules of the SEC. As a result, we will qualify for, and intend to rely on, exemptions from certain corporate governance requirements that provide protection to stockholders of other companies.

After completion of this offering, affiliates of the Sponsors will continue to control a majority of the voting power of our outstanding common stock. As a result, we will be a “controlled company” within the meaning of the corporate governance standards of the             . Under these rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including:

 

    the requirement that a majority of the board of directors consist of “independent directors” as defined under the rules of the             ;

 

    the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

    the requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

    the requirement for an annual performance evaluation of the nominating/corporate governance and compensation committees.

Following this offering, we intend to utilize these exemptions. As a result, we will not have a majority of independent directors, our nominating/corporate governance committee and compensation committee will not consist entirely of independent directors and such committees will not be subject to annual performance evaluations. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the                 .

In addition, on June 20, 2012, the SEC adopted Rule 10C-1 under the Exchange Act (“Rule 10C-1”) to implement provisions of the Dodd-Frank Act pertaining to compensation committee independence and the role and disclosure of compensation consultants and other advisers to the compensation committee. The                 has since adopted amendments to its existing listing standards to comply with provisions of Rule 10C-1, and on January 11, 2013, the SEC approved such amendments. The amended listing standards require, among others, that:

 

    compensation committees be composed of fully independent directors, as determined pursuant to new and existing independence requirements;

 

    compensation committees be explicitly charged with hiring and overseeing compensation consultants, legal counsel and other committee advisers; and

 

    compensation committees be required to consider, when engaging compensation consultants, legal counsel or other advisers, certain independence factors, including factors that examine the relationship between the consultant or adviser’s employer and us.

As a “controlled company,” we will not be subject to these compensation committee independence requirements.

 

28


Table of Contents

An active public market for our common stock may not develop following this offering, which could limit your ability to sell your shares of our common stock at an attractive price, or at all.

Prior to this offering, there has been no public market for our common stock. We cannot predict the extent to which investor interest in our Company will lead to the development of an active trading market in our common stock or how liquid that market might become. An active public market for our common stock may not develop or be sustained after the offering. We have applied to have our common stock listed on the                     , but we cannot assure you that our application will be accepted. If an active public market does not develop or is not sustained, it may be difficult for you to sell your shares of common stock at a price that is attractive to you, or at all.

You will incur immediate and substantial dilution in the net tangible book value of the shares you purchase in this offering.

Prior stockholders have paid substantially less per share for our common stock than the price in this offering. The initial public offering price of our common stock is substantially higher than the net tangible book deficit per share of outstanding common stock prior to completion of the offering. Based on our net tangible book deficit as of March 31, 2015 and upon the issuance and sale of             shares of common stock by us at an initial public offering price of $         per share, if you purchase our common stock in this offering, you will pay more for your shares than the amounts paid by our existing stockholders for their shares and you will suffer immediate dilution of approximately $         per share in net tangible book value. Dilution is the amount by which the offering price paid by purchasers of our common stock in this offering will exceed the pro forma net tangible book value per share of our common stock upon completion of this offering. If the underwriters exercise their option to purchase additional shares, or if outstanding options to purchase our common stock are exercised, you will experience additional dilution. You may experience additional dilution upon future equity issuances or the exercise of stock options to purchase common stock granted to our employees, executive officers and directors under our 2015 Incentive Plan or other omnibus incentive plans. See “Dilution.”

Our stock price may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the initial public offering price.

After this offering, the market price for our common stock is likely to be volatile, in part because our shares have not been traded publicly and because there will be limited public float. In addition, the market price of our common stock may fluctuate significantly, and you may not be able to resell your shares at or above the initial public offering price, in response to a number of factors, such as those listed in “—Risks Related to Our Business,” and the following, most of which we cannot control:

 

    quarterly variations in our operating results compared to market expectations;

 

    changes in preferences of our customers;

 

    announcements of new products or significant price reductions by us or our competitors;

 

    size of the public float;

 

    stock price performance of our competitors;

 

    publication of research reports about our industry;

 

    changes in market valuations of our competitors;

 

    fluctuations in stock market prices and volumes;

 

    default on our indebtedness;

 

    actions by competitors;

 

    changes in senior management or key personnel;

 

29


Table of Contents
    changes in financial estimates by securities analysts;

 

    negative earnings or other announcements by us or our competitors;

 

    downgrades in our credit ratings or the credit ratings of our competitors;

 

    issuances of capital stock; and

 

    global economic, legal and regulatory factors unrelated to our performance.

The initial public offering price of our common stock will be determined by negotiations between us, our sponsors and the underwriters based upon a number of factors and may not be indicative of prices that will prevail following the consummation of this offering. Volatility in the market price of our common stock may prevent investors from being able to sell their common stock at or above the initial public offering price. As a result, you may suffer a loss on your investment.

In addition, stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were involved in securities litigation, we could incur substantial costs and our resources and the attention of management could be diverted from our business.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts on our common stock. If no securities or industry analysts commence coverage of our common stock, the trading price for our stock would be negatively impacted. If we obtain securities or industry analyst coverage on our common stock and if one or more of the analysts who covers either our debt or our equity downgrades our debt or equity or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.

Future sales of our common stock, or the perception in the public markets that these sales may occur, may depress our stock price.

Sales of substantial amounts of our common stock in the public market after this offering, or the perception that these sales could occur, could adversely affect the price of our common stock and could impair our ability to raise capital through the sale of additional shares.

In connection with this offering, we, our directors and executive officers and certain of our significant stockholders have agreed with the underwriters, other than shares being sold in this offering and subject to certain exceptions, not to dispose of or hedge any of the shares of common stock or securities convertible into or exchangeable for, or that represent the right to receive, shares of common stock during the period from the date of this prospectus continuing through the date 180 days after the date of this prospectus, except with the prior written consent of representatives of the underwriters, subject to certain exceptions and extensions. See “Underwriting (Conflicts of Interest).” Upon completion of this offering, we will have             shares of common stock outstanding (or             shares if the underwriters exercise in full their option to purchase additional shares). Of the outstanding shares, the             shares sold in this offering (or             shares if the underwriters exercise in full their option to purchase additional shares) will be freely tradable without restriction or further registration under the Securities Act of 1933, as amended (the “Securities Act”), except for any shares of our common stock that may be held or acquired by us, our directors, executive officers and other affiliates, including our sponsors,

 

30


Table of Contents

as that term is defined in the Securities Act, which will be restricted securities under the Securities Act. Restricted securities may not be sold in the public market unless the sale is registered under the Securities Act or an exemption from registration is available. Of the remaining outstanding             shares, representing     % of our total outstanding shares of common stock following this offering,             will be deemed restricted securities. A substantial portion of these             shares will be subject to the lock-up period. Restricted securities may be sold in the public market only if they are registered under the Securities Act or they qualify for an exemption from registration, such as the exemptions available under Rule 144 or 701 under the Securities Act, which rules are summarized in “Shares Eligible for Future Sale.”

In addition,             shares of common stock will be eligible for sale upon exercise of vested options and upon distribution of vested restricted stock units and share appreciation rights. As soon as practicable following this offering, we intend to file one or more registration statements on Form S-8 under the Securities Act to register all shares of common stock subject to outstanding stock options, restricted stock units and share appreciation rights and the shares of common stock subject to issuance under the 2015 Omnibus Incentive Plan to be adopted in connection with this offering. Any such Form S-8 registration statements will automatically become effective upon filing. We expect that the initial registration statement on Form S-8 will cover             shares of common stock. Once these shares are registered, they can be sold in the public market upon issuance, subject to restrictions under the securities laws applicable to resales by affiliates and the lockup agreement described above.

Upon the expiration of the lock-up agreements described above,             shares held by our affiliates would be subject to volume, manner of sale and other limitations under Rule 144. In addition, pursuant to our Registration Rights Agreement entered into in connection with the Acquisition, we granted the Sponsors the right, subject to certain conditions, to require us to register the sale of their shares of our common stock under the Securities Act and we granted the Sponsors and certain members of management piggyback registration rights providing them the right to have us include the shares of our common stock they own in any registration by the Company. By exercising their registration rights and selling a large number of shares, the selling stockholders could cause the prevailing market price of our common stock to decline. Following completion of this offering, the shares covered by registration rights would represent approximately     % of our outstanding common stock (or     %, if the underwriters exercise in full their option to purchase additional shares). Registration of any of these outstanding shares of common stock would result in such shares becoming freely tradable without compliance with Rule 144 upon effectiveness of the registration statement. See “Shares Eligible for Future Sale.”

As restrictions on resale end or if these stockholders exercise their registration rights, the market price of our shares of common stock could drop significantly if the holders of these shares sell them or are perceived by the market as intending to sell them. These factors could also make it more difficult for us to raise additional funds through future offerings of our shares of common stock or other securities.

In the future, we may also issue our securities if we need to raise capital in connection with a capital expenditure or acquisition. The amount of shares of our common stock issued in connection with a capital expenditure or acquisition could constitute a material portion of our then-outstanding shares of common stock. Any perceived excess in the supply of our shares in the market could negatively impact our share price and any issuance of additional securities in connection with investments or acquisitions may result in additional dilution to you.

Anti-takeover provisions in our organizational documents might discourage, delay or prevent acquisition attempts for us that you might consider favorable.

Certain provisions of our Third Amended and Restated Certificate of Incorporation, or our Certificate of Incorporation, and Second Amended and Restated Bylaws, or our Bylaws, may have an anti-takeover effect and may delay, defer or prevent a merger, acquisition, tender offer, takeover attempt or other change of control transaction that a stockholder might consider in its best interest, including those attempts that might result in a premium over the market price for the shares held by our stockholders.

 

31


Table of Contents

These provisions provide for, among other things:

 

    a classified board of directors with staggered three-year terms;

 

    the ability of our board of directors to issue one or more series of preferred stock;

 

    advance notice for nominations of directors by stockholders and for stockholders to include matters to be considered at our annual meetings;

 

    certain limitations on convening special stockholder meetings;

 

    the removal of directors only for cause and only upon the affirmative vote of the holders of at least 66 23% in voting power of all the then-outstanding shares of stock of the Company entitled to vote thereon, voting together as a single class, if the Sponsors and their affiliates beneficially own, in the aggregate, less than     % in voting power of the stock of the Company entitled to vote generally in the election of directors; and

 

    that certain provisions may be amended only by the affirmative vote of at least 66 23% in voting power of all the then-outstanding shares of stock of the Company entitled to vote thereon, voting together as a single class, if the Sponsors and their affiliates beneficially own, in the aggregate, less than     % in voting power of the stock of the Company entitled to vote generally in the election of directors.

These anti-takeover provisions could make it more difficult for a third party to acquire us, even if the third party’s offer may be considered beneficial by many of our stockholders. As a result, our stockholders may be limited in their ability to obtain a premium for their shares. See “Description of Capital Stock.”

We do not expect to pay any cash dividends for the foreseeable future.

The continued operation and expansion of our business along with the service of our debt will require substantial funding. Accordingly, we do not anticipate that we will pay any cash dividends on shares of our common stock for the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our board of directors deems relevant. Additionally, our operating subsidiaries are currently restricted from paying cash dividends to SunGard by the agreements governing our indebtedness, and we expect these restrictions to continue in the future. Accordingly, if you purchase shares in this offering, realization of a gain on your investment will depend on the appreciation of the price of our common stock, which may never occur. Investors seeking cash dividends in the foreseeable future should not purchase our common stock.

 

32


Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus, including the exhibits hereto, contains “forward-looking statements.” Any statements made in this prospectus that are not statements of historical fact, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include information concerning possible or assumed future results of operations, including descriptions of our business plans and strategies. These statements often include words such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates” or “anticipates,” or similar expressions which concern our strategy, plans or intentions. All statements we make relating to estimated and projected earnings, margins, costs, expenditures, cash flows, growth rates and financial results are forward-looking statements. All of these forward-looking statements are subject to risks and uncertainties that may change at any time, and, therefore, our actual results may differ materially from those we expected. We derive most of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and, of course, it is impossible for us to anticipate all factors that could affect our actual results.

Factors that could materially affect our financial results or such forward-looking statements include, among others, the risks, uncertainties and factors set forth above under “Risk Factors,” and the following factors:

 

    global economic and market conditions;

 

    the condition of the financial services industry, including the effect of any further consolidation among financial services firms;

 

    our high degree of debt-related leverage;

 

    the effect of war, terrorism, natural disasters or other catastrophic events;

 

    the effect of data privacy or security-related incidents with respect to information in our or our third-party vendors’ possession;

 

    the impact of our failure to comply with current or future laws or regulations governing the collection, disclosure, use and confidentiality of personally identifiable information;

 

    risks relating to our dependence on third-party vendors;

 

    risks relating to our compliance with government regulations in connection with our business or by providing technology services to certain financial institutions;

 

    the effect of disruptions to our systems and infrastructure;

 

    the timing and magnitude of software sales;

 

    the timing and scope of technological advances;

 

    the market and credit risks associated with broker/dealer operations;

 

    our inability to successfully compete in an intensely competitive environment;

 

    the ability to retain and attract customers and key personnel;

 

    risks relating to the foreign countries where we transact business;

 

    the integration and performance of acquired businesses;

 

    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;

 

    a material weakness in our internal controls;

 

    unanticipated changes in our income tax provision or the enactment of new tax legislation, issuance of regulations or relevant judicial decisions; and

 

33


Table of Contents
    the AS Split-Off failing to qualify as a tax free transaction.

There may be other factors, many of which are beyond our control, that may cause our actual results to differ materially from the forward-looking statements, including factors disclosed under the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus. You should evaluate all forward-looking statements made in this prospectus in the context of these risks and uncertainties.

The forward-looking statements contained in this prospectus speak only as of the date of this prospectus. We undertake no obligation to publicly release the result of any revisions to these forward-looking statements, to reflect events or circumstances after the date of this prospectus or to reflect the occurrence of unanticipated events.

 

34


Table of Contents

USE OF PROCEEDS

We estimate that we will receive net proceeds of approximately $         million from the sale of shares of our common stock in this offering, assuming an initial public offering price of $         per share, the mid-point of the estimated price range set forth on the cover page of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise in full their option to purchase additional shares, the net proceeds to us will be approximately $         million.

We expect to use approximately $         million of the net proceeds from this offering to repay approximately $         of SDS’s outstanding indebtedness.

An increase or decrease of 1,000,000 shares from the expected number of shares to be sold by us in this offering, assuming no change in the assumed initial offering price per share, the mid-point of the range on the cover of this prospectus, would increase or decrease our net proceeds from this offering by $         million. A $1.00 increase or decrease in the assumed initial offering price of $         per share, based on the mid-point of the estimated price range set forth on the cover page of this prospectus, would increase or decrease the net proceeds to us from this offering by $         million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

35


Table of Contents

DIVIDEND POLICY

We do not intend to pay cash dividends on our common stock in the foreseeable future. Any decision to pay dividends in the future will be at the discretion of our board of directors and will depend on our financial condition, capital requirements, restrictions contained in current or future financing instruments and other factors that our board of directors deems relevant. Additionally our ability to pay dividends is limited by restrictions on the ability of our operating subsidiaries to make distributions, including restrictions under the terms of the agreements governing our debt and by our Principal Investor Agreement. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Debt” and “Description of Indebtedness” for a description of the restrictions on our ability to pay dividends. For the years ended December 31, 2012, December 31, 2013 and December 31, 2014, we paid dividends of $724 million, $3 million and $2 million, respectively.

 

36


Table of Contents

DILUTION

If you invest in our common stock in this offering, your ownership interest in us will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the adjusted net tangible book value per share of our common stock after this offering. Dilution results from the fact that the per share offering price of the common stock is substantially in excess of the book value per share attributable to the shares of common stock held by existing stockholders.

Our net tangible book deficit as of March 31, 2015 was approximately $         million, or $(        ) per share of our common stock. We calculate net tangible book value per share by taking the amount of our total tangible assets, reduced by the amount of our total liabilities, and then dividing that amount by the total number of shares of common stock outstanding.

After giving effect to our sale of the shares in this offering at an initial public offering price of $         per share, the mid-point of the estimated price range set forth on the cover page of this prospectus and after deducting estimated underwriting discounts and commissions, our adjusted net tangible book deficit on March 31, 2015 would have been $(        ) million, or $(        ) per share of our common stock. This amount represents an immediate increase in net tangible book value (or a decrease in net tangible book deficit) of         per share to existing stockholders and an immediate and substantial dilution in net tangible book value of $         per share to new investors purchasing shares in this offering at the initial public offering price.

The following table illustrates this dilution on a per share basis:

 

Assumed initial public offering price per share

$     

Net tangible book value (deficit) per share as of March 31, 2015

$ (            
  

 

 

   

Increase in tangible book value per share attributable to new investors

$     

Adjusted net tangible book value (deficit) per share after this offering

$ (            
    

 

 

 

Dilution per share to new investors

$ (            
    

 

 

 

Dilution is determined by subtracting adjusted net tangible book value per share of common stock after the offering from the initial public offering price per share of common stock.

If the underwriters exercise in full their option to purchase additional shares, the adjusted net tangible book deficit per share after giving effect to the offering would be $(        ) per share. This represents an increase in adjusted net tangible book value (or a decrease in net tangible book value deficit) of $         per share to the existing stockholders and dilution in adjusted net tangible book value of $         per share to new investors.

Assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting estimated underwriting discounts and commissions and offering expenses payable by us, a $1.00 increase or decrease in the assumed initial offering price of $         per share, the mid-point of the range set forth on the cover page of this prospectus, would increase or decrease the net tangible book value attributable to new investors purchasing shares in this offering by $         per share and the dilution to new investors by $         per share and increase or decrease the adjusted net tangible book value per share after the offering by $         per share.

The following table summarizes, as of March 31, 2015, the differences between the number of shares purchased from us, the total consideration paid to us, and the average price per share paid by existing stockholders and by new investors. As the table shows, new investors purchasing shares in this offering will pay an average price per share substantially higher than our existing stockholders paid. The table below assumes an initial public offering price of $         per share, the mid-point of the range set forth on the cover of this

 

37


Table of Contents

prospectus, for shares purchased in this offering and excludes underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Shares Purchased     Total Consideration  
     Number        %         Amount      %     Avg/Share  

Existing stockholders

               $                  $                

New investors

                           $                
  

 

    

 

 

      
       $                       
  

 

    

 

 

      

If the underwriters were to fully exercise the underwriters’ option to purchase             additional shares of our common stock, the percentage of shares of our common stock held by existing stockholders who are directors, officers or affiliated persons would be     % and the percentage of shares of our common stock held by new investors would be     %.

The foregoing tables and calculations are based on the number of shares of our common stock outstanding as of March 31, 2015 and excludes:

 

    shares of common stock issuable upon exercise of stock options outstanding as of March 31, 2015 at a weighted average exercise price of $         per share under our equity incentive plans; and

 

    additional shares of common stock reserved for future issuance under the 2015 Incentive Plan.

To the extent any of these outstanding options are exercised, there will be further dilution to new investors. To the extent all of such outstanding options had been exercised as of March 31, 2015, the as adjusted net tangible book deficit per share after this offering would be $(        ), and total dilution per share to new investors would be $        .

 

38


Table of Contents

RECAPITALIZATION

At or prior to the consummation of this offering, we expect to undertake the following Transactions to simplify our capital structure.

As of March 31, 2015, SunGard had outstanding 286.4 million shares of common stock, which is divided into nine classes: Classes A-1 through A-8 common stock (which we refer to collectively as the “Class A common stock”) and Class L common stock. As of March 31, 2015, SunGard Capital Corp. II, a direct subsidiary of SunGard, had outstanding 100 shares of common stock, all of which are held by SunGard, and 7.6 million shares of non-voting preferred stock, which are held by the current holders of Class A common stock and Class L common stock. Prior to the consummation of this offering, SunGard will fully and unconditionally guarantee the dividend and liquidation payment obligations of SunGard Capital Corp. II’s preferred stock. Thereafter, and at or prior to the consummation of this offering, the Second Amended and Restated Certificate of Incorporation of SunGard will be amended so as to recapitalize the Class A common stock and the Class L common stock into a new, single class of common stock, which is the same class of common stock that is being offered hereby. Pursuant to such amendment, the existing shares of Class A common stock will be cancelled, and the Class L common stock will be converted into a number of shares of new common stock having an aggregate fair market value equal to the converted shares. In addition, holders of SunGard Capital Corp. II preferred stock will transfer all of their shares of SunGard Capital Corp. II preferred stock to SunGard in exchange for shares of new common stock having an aggregate fair market value equal to the exchanged shares. We refer to these transactions, collectively, as the “Recapitalization.”

After the Recapitalization and at or prior to the consummation of this offering, we will cause SunGard Holding Corp. to merge with and into SunGard Capital Corp. II with SunGard Capital Corp. II surviving the merger.

 

 

39


Table of Contents

CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of March 31, 2015:

 

    on an actual basis; and

 

    on an as adjusted basis to give effect to (1) the Recapitalization; (2) the sale by us of approximately             shares of our common stock in this offering, after deducting estimated underwriting discounts and commissions and offering expenses payable by us; (3) the payment of estimated fees and expenses (other than underwriting discounts and commissions) in connection with this offering at an assumed initial public offering price of $         per share, the mid-point of the price range set forth on the cover page of this prospectus and (4) the application of the estimated net proceeds from the offering, as described in “Use of Proceeds,” at an assumed initial public offering price of $         per share, the mid-point of the estimated price range set forth on the cover page of this prospectus.

You should read this table in conjunction with the information contained in “Use of Proceeds,” “Selected Historical Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Description of Indebtedness,” as well as the consolidated financial statements and the notes thereto included elsewhere in this prospectus.

 

     As of March 31, 2015  
     Actual     As adjusted(1)  
(dollars in millions, except par value)       

Cash and cash equivalents

   $ 555      $                
  

 

 

   

 

 

 

Debt:

Senior Secured Credit Facilities

Secured Revolving Credit Facility

  —     

Tranche C due February 28, 2017

  400   

Tranche E due March 8, 2020

  1,918   

7.375% Senior Notes due 2018

  511   

7.625% Senior Notes due 2020

  700   

6.625% Senior Subordinated Notes due 2019

  1,000   

Secured Accounts Receivable Facility

  140   

Other

  1   

Debt (continuing operations)

Other (discontinued operations)

  

 

 

   

 

 

 

Total debt

$ 4,670    $     

Temporary Equity(2):

$ 96    $     

Stockholders’ equity:

Pro forma common stock, $0.01 par value (         million shares authorized,         million issued and         million outstanding, actual, respectively;         shares authorized

  —     

Class L common stock, convertible par value, $.001 per share, cumulative 13.5% per annum compounded quarterly, aggregate liquidation on preference of $8,337 million, 50,000,000 shares authorized, 29,062,421 shares issued

Class A common stock, par value $.001 per share; 550,000,000 shares authorized, 261,565,118 shares issued

Additional paid-in capital

$ 2,681    $     

Treasury stock, 418,438 shares of Class L common stock actual; and 3,769,251 shares of Class A common stock actual; shares of common stock as adjusted

  (36

Accumulated deficit

  (3,917

Accumulated other comprehensive loss

  (203

Total stockholders’ equity

  (1,475

Non-controlling interests(3)

  (1,532
  

 

 

   

 

 

 

Total equity

  57   
  

 

 

   

 

 

 

Total capitalization

$ 4,823    $     
  

 

 

   

 

 

 

 

40


Table of Contents

 

(1) To the extent we change the number of shares of common stock sold by us in this offering from the shares we expect to sell or we change the initial public offering price from the assumed initial offering price of $         per share, the mid-point of the estimated price range set forth on the cover page of this prospectus, or any combination of these events occurs, the net proceeds to us from this offering and each of the total stockholders’ equity and total capitalization may increase of decrease. A $1.00 increase or decrease in the assumed initial public offering price per share of the common stock, assuming no change in the number of shares of common stock to be sold, would increase or decrease the net proceeds that we receive in this offering and each of total stockholders’ equity and total capitalization by approximately $        . An increase or decrease of 1,000,000 shares in the expected number of shares to be sold in the offering, assuming no change in the assumed initial offering price per share, would increase or decrease our net proceeds from this offering and our total stockholders’ equity and total capitalization by approximately $        .
(2) Consists of certain existing equity interests subject to a put option excercisable upon termination of employment due to death or disability. The put option will expire upon an initial public offering.
(3) Non-controlling interest, both temporary and permanent, represent the combined ownership interests of the preferred stockholders of SunGard Capital Corp. II.

 

41


Table of Contents

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

Set forth below is our selected historical consolidated financial data as of the dates and for the periods indicated.

The table below presents our summary historical consolidated financial data as of the dates and for the periods indicated. We have derived the summary historical consolidated financial data as of December 31, 2013 and 2014 and for each of the years ended December 31, 2012, 2013 and 2014 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the summary historical consolidated financial data as of December 31, 2010, 2011 and 2012 and for each of the years ended December 31, 2010 and 2011 from our audited historical financial statements which are not included in this prospectus. We have derived the summary historical consolidated financial data as of March 31, 2014 from our unaudited consolidated financial statements which are not included in this prospectus, and we have derived the summary historical consolidated financial data as of March 31, 2015 and for each of the three months ended March 31, 2014 and March 31, 2015 from our unaudited consolidated financial statements included elsewhere in this prospectus, which have been prepared on the same basis as our audited consolidated financial statements.

Our historical results are not necessarily indicative of future operating results. The following table should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes thereto included elsewhere in this prospectus.

 

    Year ended December 31,     Three months
ended
March 31,
 
    2010     2011     2012     2013     2014     2014     2015  
(dollars in millions, except per share amounts)                                 (unaudited)  

Consolidated statements of comprehensive income (loss):

             

Revenue

  $ 2,909      $ 2,921      $ 2,808      $ 2,761      $ 2,809      $ 653      $ 671   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

  59      242      348      404      86      (289   115   

Other income (expense):

Interest income

  2      3      1      1      1      —        —     

Interest expense and amortization of deferred financing fees

  (569   (463   (360   (326   (291   (74   (71

Loss on extinguishment of debt

  (58   (3   (82   (6   (61   (61   —     

Other income (expense)

  7      —        1      (2   —        —        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense)

  (618   (463   (440   (333   (351   (135   (71
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

  (559   (221   (92   71      (265   (424   44   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Benefit from (provision for) income taxes

  96      143      49      (26   57      101      (18
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

  (463   (78   (43   45      (208   (323   26   

Income (loss) from discontinued operations, net of tax(1)

  (107   (73   (23   17      (14   (17   2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  (570   (151   (66   62      (222   (340   28   

Income attributable to non-controlling interests

  (191   (225   (251   (169   (174   (50   (43
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to SunGard

$ (761 $ (376 $ (317 $ (107 $ (396 $ (390 $ (15
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings (loss) per share:

Historical:

Net income (loss) per share:

Class L stockholders

$ 20.61    $ 23.52    $ 26.86    $ 30.68    $ 35.03    $ 8.14    $ 9.29   

Class A stockholders—continuing operations

  (4.84   (3.79   (4.12   (3.89   (5.37   (2.34   (1.10

Class A stockholders—total

  (5.26   (4.07   (4.22   (3.83   (5.42   (2.40   (1.09

Pro forma(2):

Net income (loss) per share—continuing operations

Weighted average number of shares

 

42


Table of Contents
    Year ended December 31,     Three months
ended March 31,
 
    2010     2011     2012     2013     2014     2014     2015  
(dollars in millions, except per share amounts)                                 (unaudited)  

Diluted earnings (loss) per share:

             

Historical:

             

Net income (loss) per share:

             

Class L stockholders

  $ 20.61      $ 23.52      $ 26.86      $ 30.68      $ 35.03      $ 8.14      $ 9.29   

Class A stockholders—continuing operations

    (4.84     (3.79     (4.12     (3.90     (5.37     (2.34     (1.10

Class A stockholders—total

    (5.26     (4.07     (4.22     (3.84     (5.42     (2.40     (1.09

Pro forma(2):

             

Net income (loss) per share—continuing operations

             

Weighted average number of shares

             

Consolidated statements of cash flows data:

             

Net cash provided by (used in):

             

Operating activities:

             

Continuing operations

  $ np      $ 164      $ 287      $ 421      $ 332      $ 86      $ 154   

Discontinued operations

    np        514        (43     324        33        36        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  721      678      244      745      365      122      154   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investing activities:

Continuing operations

  np      (137   (136   (112   (147   (28   (32

Discontinued operations

  np      (189   1,597      (146   7      5      1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  (260   (326   1,461      (258   (140   (23   (31
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities:

Continuing operations

  np      (255   (2,036   (324   (1,355   (1,338   (4

Discontinued operations

  np      2      (3   (2   887      887      —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  (344   (253   (2,039   (326   (468   (451   (4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated balance sheet data (at period end):

Cash and cash equivalents(3)

$ 616    $ 832    $ 535    $ 675    $ 447    $ 355    $ 555   

Total assets

  12,968      12,550      10,018      9,778      6,511      6,452      6,389   

Total debt(4)

  8,050      7,823      6,658      6,384      4,669      4,671      4,670   

Total liabilities

  11,364      11,094      9,328      8,979      6,322      6,302      6,236   

Total equity

  1,452      1,375      614      695      92      70      57   

Other financial data (continuing operations):

Capital expenditures(5)

$ np    $ 97    $ 97    $ 111    $ 143    $ 28    $ 28   

Cash interest expense(6)

  524      420      323      288      272      67      67   

Adjusted EBITDA(7)

  703      707      749      766      765      145      175   

 

“np” = not presented
(1) In January 2012, we sold our Higher Education business and in July 2012 we sold one FS subsidiary. We recorded a $571 million gain on the sales. As a result of the HE sale, in 2012, we paid approximately $400 million in income tax payments. In January 2014, we sold two small businesses within our FS segment for €27 million paid at closing, €9 million to be paid within three years (“deferred purchase price”) and €2 million to be paid upon the successful assignment of certain customer contracts. During the first quarter of 2015, we successfully assigned certain of these customer contracts and recognized a $2 million gain in discontinued operations. The deferred purchase price is unconditional and is secured by a bank guarantee. On March 31, 2014, we completed the AS Split-Off. These businesses are included in our financial results as discontinued operations for all periods presented.
(2) Reflects the Recapitalization and the                 -for-one stock split.
(3) Cash and cash equivalents excludes cash related to discontinued operations of $162 million, $41 million, $11 million and $31 million at December 31, 2010, 2011, 2012, and 2013, respectively.

 

43


Table of Contents
(4) Reflects the total debt of the Company, which has decreased over time due to repayments from the net proceeds of businesses we sold and from the split-off of the AS business, as well as repayments from excess cash flows and available cash. Total debt excludes debt related to discontinued operations of $5 million, $6 million, $4 million and $8 million at December 31, 2010, 2011, 2012, and 2013, respectively.
(5) Capital expenditures represent cash paid for property, equipment and software, as well as the capitalization of internal costs related to software development initiatives.
(6) Cash interest expense is net of cash interest income and does not include any amortization of capitalized debt issuance cost, accretion of bond discounts, accretion of discounted liabilities, or loss on sale of receivables.
(7) Our primary non-GAAP measure is Adjusted EBITDA, whose corresponding GAAP measure is net income (loss). We define Adjusted EBITDA as net income (loss) less income (loss) from discontinued operations, income taxes, loss on extinguishment of debt, interest expense and amortization of deferred financing fees, depreciation (including the amortization of capitalized software), amortization of acquisition-related intangible assets, trade name and goodwill impairment charges, severance and facility closure charges, stock compensation expense, management fees from our Sponsors, and certain other costs.

We believe Adjusted EBITDA is an effective tool to measure our operating performance since it excludes non-cash items and certain variable charges. We use Adjusted EBITDA extensively to measure the financial performance of SunGard and also to report our results to our board of directors. We use a similar measure, as defined in our senior secured credit agreement, for purposes of computing our debt covenants.

While Adjusted EBITDA and similar measures are frequently used as measures of operations and the ability to meet debt service requirements, these terms are not necessarily comparable to other similarly titled captions of other companies due to the potential inconsistencies in the method of calculation. Adjusted EBITDA does not reflect the impact of earnings or charges resulting from matters that we may consider not to be indicative of our ongoing operations. In particular, our definition of Adjusted EBITDA adds back certain noncash, extraordinary or unusual charges that are deducted in calculating net income (loss). However, these are expenses that may recur, vary greatly and are difficult to predict. Adjusted EBITDA should not be considered as an alternative to cash flows from operating activities, as a measure of liquidity or as an alternative to operating income or net income as indicators of operating performance.

 

44


Table of Contents

The following table presents a reconciliation of Adjusted EBITDA, a non-GAAP measure, to net income (loss), which is the nearest comparable GAAP measure.

 

    Year ended December 31,     Three months ended
March 31,
 
        2010             2011             2012             2013             2014             2014             2015      
(dollars in millions)                                 (unaudited)  

Net income (loss)

  $ (570   $ (151   $ (66   $ 62      $ (222   $ (340   $ 28   

Income (loss) from discontinued operations, net of tax

    (107     (73     (23     17        (14     (17     2   

Benefit from (provision for) income taxes

    96        143        49        (26     57        101        (18

Loss on extinguishment of debt(a)

    (58     (3     (82     (6     (61     (61     —     

Interest expense and amortization of deferred financing fees

    (569     (463     (360     (326     (291     (74     (71

Other income (expense), net

    9        3        2        (1     1        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

  59      242      348      404      86      (289   115   

Depreciation

  87      91      96      104      107      24      29   

Amortization of acquisition-related intangible assets

  274      260      217      182      136      43      21   

Trade name impairment charge

  —        —        —        —        339      339      —     

Goodwill impairment charges

  205      12      —        —        —        —        —     

Restructuring charges(b)

  15      48      42      17      27      5      2   

Stock compensation expense

  23      27      31      39      42      9      10   

Management fees

  9      7      9      8      9      2      2   

Other costs (included in operating income)(c)

  31      20      6      12      19      12      (4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

$ 703    $ 707    $ 749    $ 766    $ 765    $ 145    $ 175   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (a) Loss on extinguishment of debt includes in 2010 the loss on extinguishment of $1.6 billion of senior notes due in 2013 and the write-off of deferred financing fees related to the refinancing of a portion of our U.S. Dollar-denominated term loans and retirement of $100 million of pound Sterling-denominated term loans. Loss on extinguishment of debt includes in 2012 the write-off of deferred financing fees associated with the January 2012 repayment of $1.22 billion of our U.S. Dollar-denominated term loans, the April 2012 retirement of $500 million, 10.625% senior notes due 2015, the December 2012 retirement of $1 billion, 10.25% senior subordinated notes due 2015 and the December 2012 repayment of $217 million of U.S. Dollar-denominated term loans. Loss on extinguishment of debt for 2014 primarily includes (i) a $36 million loss associated with the exchange of SpinCo Notes for SunGard Notes and (ii) the write-off of deferred financing fees associated with (a) the repayment of $1.005 billion of term loans and the retirement of $389 million of senior notes due 2018, both resulting from the AS Split-Off (see Note 1 and Note 5 of Notes to Consolidated Financial Statements), (b) the $250 million reduction of the revolving credit facility and (c) the repayment of $60 million of the accounts receivable facility term loans.
  (b) Restructuring charges include severance and related payroll taxes and reserves to consolidate certain facilities.
  (c) Other costs include strategic initiative expenses, certain expenses associated with acquisitions made by the Company, and foreign currency gains and losses.

 

45


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

The following discussion contains management’s discussion and analysis of our financial condition and results of operations and should be read together with “Summary Historical Consolidated Financial Data,” “Selected Historical Consolidated Financial Data” and our consolidated financial statements and related notes thereto included elsewhere in this prospectus. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including but not limited to those described in the “Risk Factors” section of this prospectus. Actual results may differ materially from those contained in any forward-looking statements. You should read “Special Note Regarding Forward-Looking Statements” and “Risk Factors.”

Overview

SunGard is a leading provider of mission-critical software to financial institutions globally. Our solutions automate a wide range of complex business processes across the financial services industry, including those associated with trading, securities operations, administering investment portfolios, accounting for investment assets, and managing risk and compliance requirements. We are the largest provider of industry-specific software by revenue to the segments that we serve, and are differentiated by the breadth of our offerings, leading edge technology, operating scale, deep domain expertise, and global reach. In 2014, we generated $2.8 billion in revenue, 70% of which was recurring, along with attractive operating margins and strong cash flows.

In 2011, we embarked on a major transformation program to create a more integrated enterprise, focused primarily on the financial services industry. Led by a new executive leadership team, this effort focused on two core activities: (i) aligning the organization around a new, integrated operating model and (ii) shifting investment priorities to better drive organic growth and serve the evolving needs of our customers.

We also exited non-core business lines representing more than $2 billion of revenues, including the sale of Higher Education in January 2012 ($492 million in 2011 revenue), the split-off of Availability Services in March 2014 ($1.4 billion in 2013 revenue) and other smaller divestitures. In addition, within our Financial Systems segment, we have exited slower growing or low margin business lines representing $203 million in revenue since 2010, which negatively impacted revenue growth in 2012 and 2013. We are now a focused company providing vertical-specific software for the financial services industry.

Our Business Model

Our business model is founded on software, which is surrounded by services, resulting in strong recurring revenue streams with attractive profit margins and strong cash flows. At the heart of our business model is our proprietary software that is licensed or rented to customers for periods typically ranging from three to seven years and also offered as a service, which we refer to as our SaaS offering. Our license offerings have traditionally been run on our customers’ premises but are increasingly delivered from our private cloud. In addition, we provide professional services and business processing as a service, or BPaaS (collectively, “Services”).

Because we sell our software maintenance, rentals, SaaS, cloud and BPaaS offerings under long-term contracts and recognize the revenue ratably over the term of the contracts, we have good visibility into future revenue, which helps us to manage spending proactively. We refer to this contractually committed revenue as “recurring revenue.” Our revenue streams are highly recurring as a result of our deeply embedded solutions and long-running contracts typically ranging from three to seven years for software maintenance, rentals, SaaS, cloud and BPaaS offerings. In 2014, these offerings comprised 70% of our revenue, with a revenue retention rate of 95%. Our retention rate is defined as the percentage of the prior year’s recurring revenue which is retained in the current year.

The remaining 30% of our 2014 total revenue was comprised of software license fees and professional services revenue. Software license fees have generated revenue of $237 million, $240 million and $244 million for the fiscal years ended December 31, 2012, 2013 and 2014, respectively. Professional services has generated

 

46


Table of Contents

revenue of $520 million, $503 million and $528 million for the three fiscal years ended December 31, 2012, 2013 and 2014 respectively. We expect this professional services revenue to grow as we bring more software to market.

We classify our revenue into three categories: Software revenue, SaaS and cloud revenue and Services revenue, as described below.

Software Revenue

Our Software revenue represented 40% of our 2014 total revenue and is comprised of traditional software license fees, maintenance and support fees, and fees from the resale of third-party software licenses. These software license fees include term licenses, perpetual licenses and, for customers who would prefer a periodic fee instead of a larger up-front payment, rental fees. Maintenance and support fees provide customers with periodic technology updates and interactive support related to our software.

Within Software, perpetual and term licenses revenue is generally recognized at the time of sale. The majority of our software license revenue results from the sale of term licenses, which generally have terms of three to seven years. The scheduled renewals of these term licenses provide good visibility to our future revenue pipeline. However, the timing of these license sales can significantly impact our revenue and profitability in any given quarter.

SaaS and Cloud Revenue

Our SaaS and cloud offerings comprised 38% of our total revenue in 2014. SaaS and cloud offerings are delivered from SunGard’s private cloud to provide customers with a secure and reliable environment operated by qualified SunGard personnel. These offerings allow customers to take advantage of SunGard’s deep domain expertise while avoiding the upfront cost of licensing and IT infrastructure. SaaS and cloud revenue also includes revenue from our proprietary trading algorithms and trade execution network.

Our cloud offerings have been a source of consistent growth in recent years as an increasing number of customers have opted to deploy their licensed SunGard applications in our private cloud. In these instances, we charge separately for hosting these licensed SunGard applications in our private cloud. We classify that hosting revenue in our SaaS and cloud revenue category, while the corresponding software license, maintenance and rental revenue is classified in our Software revenue category.

Our SaaS offerings include fully integrated software, hosting and application management services, which are also delivered from SunGard’s private cloud. All revenue related to our SaaS offerings is classified in our SaaS and cloud revenue category, noting the fully integrated service that we provide.

These SaaS and cloud offerings are generally sold on multi-year contracts. As such, they form a strong recurring revenue stream for our company and have historically generated high customer renewal rates. Consistent with industry trends, we expect SaaS and cloud revenue to become a greater portion of our overall revenue going forward.

Services Revenue

Professional services and BPaaS revenue represented approximately 22% of our 2014 total revenue. Professional services offerings help customers to install, optimize and integrate SunGard’s software into their computing environment. We expect this revenue stream to grow as we bring more software to market.

As is typical in our industry, our profit margins on professional services revenue are lower than on our revenue from software offerings. We are currently investing to expand our global professional services delivery capacity in order to further improve our customers’ adoption of our core technologies.

 

47


Table of Contents

Our BPaaS offerings typically provide back-office processing services to our customers where the process is built on a SunGard application. The combination of our industry and application knowledge, coupled with our customers’ desire to focus on their core competencies, is resulting in continued growth in these BPaaS offerings. Recently, we have expanded our BPaaS services to include utility offerings covering derivatives processing and U.S. transfer agency services. These utilities are based on SunGard’s proprietary software and allow us to service multiple customers from a single delivery center. We expect revenue to grow from these offerings, but, margins are expected to be lower than from our software revenue over the next few years as we invest to grow these utilities.

Profit and Cash Flow

SunGard’s business model generates attractive operating profits and strong cash flow, driven by:

 

    our competitively-differentiated and deeply embedded software offerings;

 

    our ability to leverage our scale in sales, development, service delivery and back office administration;

 

    our global reach, which allows us to sell, implement and support consistent offerings to the established and emerging markets of the world; and

 

    our use of low cost locations in development, delivery and administration.

Over the past few years, we have shifted from a distributed model to an integrated cross-company model in order to improve operating margins even as we invest to grow our business.

Geographic Operations

SunGard manages operations in four major geographies around the world, generating $2.8 billion in revenue for the year ended December 31, 2014, as described below.

 

Region

   Percent of
Total Revenue
 

North America

     64

Europe

     22

Asia Pacific

     10

Middle East, Africa, Central and South America

     4

Within these geographies, there are both established markets and emerging markets. The established markets, comprised of the United States, Western Europe, Japan and Australia, generated 88% of our total revenue in 2014. These large, mature markets include some of our largest customers and the most extensive use of our technologies. The emerging markets, comprised of China, India, Southeast Asia, the Middle East, Africa, Latin America and Eastern Europe, comprised 12% of our total revenue in 2014. These markets are less mature, but are much faster growing than the established markets. Our customers in these regions have purchased our offerings as they compete on both a local and increasingly global basis.

Similar to our revenue, our resources and facilities are also geographically dispersed. This provides better local customer support and also results in natural currency hedges such that currency movements that may impact revenue growth have less of an impact on profit growth.

Our Segments

We operate our company in two reporting segments, Financial Systems and Public Sector & Education.

Financial Systems

Our Financial Systems (“FS”) segment offers software and services that automate a wide range of complex business processes across the financial services industry, including those associated with trading, securities

 

48


Table of Contents

operations, administering investment portfolios, accounting for investment assets, and managing risk and compliance requirements. We meet the needs of a broad range of end users, including asset managers, CFOs and treasurers, traders on the sell-side and buy-side, securities operations managers, fund administrators, risk and compliance officers, plan administrators, and registered investment advisors.

Public Sector & Education

In addition to our primary FS segment, our Public Sector and Education (“PS&E”) segment offerings are designed to meet the specialized needs of local and state governments, public safety and justice agencies, and K-12 educational institutions. These customers rely on us to provide innovative and mission-critical software to address their most important enterprise resource planning (“ERP”) and administrative processes. These ERP offerings support a range of specialized functions such as accounting, human resources, emergency dispatch operations, the operation of courts and jails, and K-12 student information systems.

Results of Operations

We evaluate our performance using both U.S. GAAP (accounting principles generally accepted in the United States) and non-GAAP measures. Our primary non-GAAP measure is Adjusted EBITDA. For a definition of Adjusted EBITDA and a reconciliation to net income, please refer to “Non-GAAP Financial Measures” included elsewhere in this document.

We are also supplementing certain GAAP measures with comparable measures on a constant-currency basis, a non-GAAP measure, which exclude the impacts from changes in currency translation. We believe providing explanations of the year-to-year variances in our results on a constant-currency basis is meaningful for assessing how our underlying businesses have performed due to the fact that we have international operations that are material to our overall operations. As a result of our international operations, total revenues and expenses are affected by changes in the U.S. Dollar against international currencies. To present our constant currency year-over-year changes, current period results for entities reporting in currencies other than U.S. Dollars are converted to U.S. Dollars at the average exchange rate used in the prior-year period rather than the actual exchange rates in effect during the current-year period. In each of the tables below, we present the percent change based on actual, unrounded results in reported currency and in constant currency.

 

49


Table of Contents

Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014

Consolidated Results of Operations (Unaudited)

 

     Three Months Ended March 31,     Year-over-Year Change  
                 % of Revenue     As
Reported
    At Constant
Currency
 
(dollars in millions)    2014     2015     2014     2015      

Revenue

   $ 653      $ 671        100     100     3     6

Costs and expenses:

            

Cost of sales and direct operating

     269        268        41     40     0     3

Sales, marketing and administration

     168        152        26     23     (10 )%      (6 )% 

Product development and maintenance .

     99        86        15     13     (12 )%      (7 )% 

Depreciation

     24        29        4     4     17     21

Amortization of acquisition-related intangible assets

     43        21        7     3     (51 )%      (49 )% 

Trade name impairment

     339        —          52     0     nm        nm   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

  942      556      144   83   (41 )%    (39 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

  (289   115      (44 )%    17   140   139
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating margin

  (44 )%    17   61.3   60.5

Other income (expense):

Interest expense and amortization of deferred financing fees

  (74   (71   (11 )%    (10 )%    5   5

Loss on extinguishment of debt

  (61   —        (9 )%    0   nm      nm   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense)

  (135   (71   (21 )%    (10 )%    48   49
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

  (424   44      (65 )%    7   nm      nm   

Benefit from (provision for) income taxes

  101      (18   15   (3 )%    nm      nm   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

  (323   26      (50 )%    4   nm      nm   

Income (loss) from discontinued operations, net of tax

  (17   2      (3 )%    0   nm      nm   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  (340   28      (52 )%    4   nm      nm   

Income attributable to non-controlling interests

  (50   (43   (8 )%    (6 )%    nm      nm   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to SunGard

$ (390 $ (15   nm      nm      nm      nm   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Financial Information

Adjusted EBITDA(1)

$ 145    $ 175      22   26   21   20
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Note: Columns may not total due to rounding.

“nm” = not meaningful

(1) Adjusted EBITDA is a non-GAAP financial measure we use to evaluate our performance and our reportable segments. Please refer to “Non-GAAP Financial Measures” for more information and a reconciliation to Net Income.

Revenue

For the first quarter of 2015, consolidated revenue grew 6% year-over-year on a constant currency basis to $671 million. Our revenue growth was largely due to market reception of our new technology, continued growth in the emerging markets, and growth in Services revenue. For each of the quarters ended March 31, 2015 and 2014, the mix of our revenue was similar, with Software representing 38% of total revenue, SaaS and cloud revenue representing 41% of total revenue, and Services revenue representing 21% of total revenue. Key drivers in our revenue categories are as follows:

 

    Software revenue grew 5% at constant currency in the current-year quarter from strong license sales of our latest technology to both new and existing customers. Software license revenue increased 32% on a constant-currency basis from the prior-year quarter.

 

50


Table of Contents
    SaaS and cloud revenue also grew 5% at constant currency in the current-year quarter primarily driven by increased volumes in our SaaS offerings and greater adoption of our cloud offerings, delivered from our private cloud.

 

    Services revenue increased approximately 9% at constant currency in the current-year quarter primarily due to growth in professional services as customers increased their spending to implement our solutions and integrate them into their operating environments.

Cost of Sales and Direct Operating

Cost of sales and direct operating expense was 40% and 41% of total revenue in the quarters ended March 31, 2015 and 2014, respectively. Cost of sales and direct operating expense increased $9 million, or 3%, at constant currency primarily due to an increase in expenses associated with customer trading activity in our broker/dealer business and a $3 million increase in employment-related costs partly due to the increase in professional services revenue, partially offset by $5 million of currency transaction gains.

Sales, Marketing and Administration

Sales, marketing and administration expense was 23% and 26% of total revenue in the quarters ended March 31, 2015 and 2014, respectively. Sales, marketing and administration expense decreased $10 million, or 6%, at constant currency primarily due to approximately $10 million of one-time, strategic initiative expenses related to the AS Split-Off in the first quarter of 2014 and a $1 million decrease in severance and facilities restructuring expenses, partially offset by a $5 million increase in medical expenses.

Product Development and Maintenance

Product development and maintenance expense was 13% and 15% of total revenue in the quarters ended March 31, 2015 and 2014, respectively. Product development and maintenance expense decreased $7 million, or 7%, at constant currency primarily due to a $4 million decrease in employment-related expenses and a $2 million increase in capitalized software related to our technology investments.

Depreciation

Depreciation expense was 4% of total revenue in each of the quarters ended March 31, 2015 and 2014. Depreciation expense increased 21% at constant currency in the current-year quarter primarily due to increased capitalization of software assets in the past year.

Amortization of Acquisition-Related Intangible Assets

Amortization of acquisition-related intangible assets was 3% and 7% of total revenue in the quarters ended March 31, 2015 and 2014, respectively. Amortization of acquisition-related intangible assets decreased 49% at constant currency primarily due to the continued runoff of certain acquisition-related intangible assets primarily stemming from the LBO transaction in 2005.

Trade Name Impairment

As a result of the AS Split-Off, we recognized a $339 million impairment of the carrying value of the SunGard trade name as of March 31, 2014. For further information, refer to “Goodwill and Trade Name Impairment Tests” included in “Use of Estimates and Critical Accounting Policies” elsewhere in this prospectus. There was no trade name impairment in the quarter ended March 31, 2015.

 

51


Table of Contents

Operating Income

Operating income increased $115 million in the quarter ended March 31, 2015 from an operating loss of $289 million in the prior-year quarter. Operating income was impacted by the items discussed above. Our operating margin increased by 60.5% primarily due to the 51.9% margin impact of the trade name impairment charge, the 3.4% margin impact of the decrease in amortization of acquisition-related intangible assets, and the 1.5% margin impact of the decrease in strategic initiative expenses.

Adjusted EBITDA

Adjusted EBITDA for the quarter ended March 31, 2015 was $175 million, an increase of 20% from the prior-year quarter on a constant-currency basis. Our Adjusted EBITDA margin increased 3.1% on a constant-currency basis, driven primarily by the strength of our Software and SaaS sales, improved professional services profitability, decreases in employee-related product development spending, and lower bad debt expense from the sale of a customer bankruptcy claim, partially offset by increased medical expenses.

Interest expense and amortization of deferred financing fees

Interest expense was $71 million and $74 million in the quarters ended March 31, 2015 and 2014, respectively. The decrease was primarily due to the write-off of deferred financing costs during the prior-year quarter resulting from the repayment and retirement of debt resulting from the AS Split-Off, and from non-capitalizable fees paid in connection with the February 2014 amendment of the Credit Agreement.

Loss on extinguishment of debt

Loss on extinguishment of debt was $61 million for the quarter ended March 31, 2014. The loss on extinguishment of debt in the prior-year quarter includes (i) a $36 million loss associated with the exchange of approximately $425 million of senior notes issued by Sungard Availability Services, Inc. (“SpinCo”) (“SpinCo Notes”) for approximately $389 million of senior notes due 2018 issued by SunGard (“SunGard Notes”) in connection with the AS Split-Off and (ii) the write-off of $25 million of deferred financing fees resulting from the early repayment of debt during the first quarter (see Note 1 of Notes to Condensed Consolidated Financial Statements).

Benefit from (provision for) income taxes

The effective income tax rates for each of the quarters ended March 31, 2015 and 2014 was 41% and 24%, respectively. The Company’s effective tax rate reflects changes in the mix of income or losses in jurisdictions with a wide range of tax rates, permanent differences between GAAP and local tax laws, the impact of valuation allowances, unrecognized tax benefits and the timing of recording discrete items. The tax rate for the quarter ended March 31, 2015 reflects an increase in the expected full year effective tax rate due primarily to a change in the mix of income by country and the inability to utilize net operating losses generated in certain countries. Further changes in the mix of income, losses in particular jurisdictions or the total amount of income for 2015 may significantly impact the estimated effective income tax rate for the year.

The tax rate for the quarter ended March 31, 2014 includes a benefit of $138 million recorded as a discrete item related to the impairment of the trade name, an expense of $46 million recorded as a discrete item due to changes in certain state deferred tax rates, primarily driven by the change in the legal entity ownership of the trade name caused by the AS Split-Off, and an expense of $9 million recorded as a discrete item to increase the valuation allowance on state net operating losses driven by the change in management’s judgment of their realizability due to the AS Split-Off.

 

52


Table of Contents

Income (loss) from discontinued operations, net of tax

Loss from discontinued operations, net of tax, was $(17) million in the quarter ended March 31, 2014. On March 31, 2014, we completed the AS Split-Off. Income (loss) from discontinued operations reflects the results of our AS business and two smaller FS subsidiaries that were sold in January 2014. Included in loss from discontinued operations in the quarter ended March 31, 2014 is a gain on the sale of two FS businesses of approximately $23 million. Also included in loss from discontinued operations in the quarter ended March 31, 2014 is sponsor management fee expense of approximately $15 million payable under the Management Agreement for services related to the issuance of the $1.025 billion AS term loan and $425 million of SpinCo Notes in connection with the AS Split-Off.

Income attributable to the non-controlling interest

Accrued dividends on SCCII’s cumulative preferred stock were $43 million and $50 million in the quarters ended March 31, 2015 and 2014, respectively. The decrease in accrued dividends is due to the decrease in outstanding preferred shares resulting from the share exchange as part of the AS Split-Off, partially offset by compounding of the cumulative, undeclared dividend.

Segment Results of Operations

Our business is organized into two segments, FS and PS&E. Corporate spending, which includes the costs of various support functions such as corporate finance, human resources, and legal, are not allocated to our reporting segments. As reflected below, we measure our financial performance using Adjusted EBITDA, which is a non-GAAP financial measure. We believe Adjusted EBITDA is an effective tool to measure our operating performance since it excludes non-cash items and certain variable charges. We use Adjusted EBITDA extensively to measure our financial performance, and also to report our results to our board of directors. Please refer to “Non-GAAP Financial Measures” for more information and a reconciliation to the nearest comparable GAAP financial measure.

Financials Systems Segment

 

           Year–over-
Year Change
 
     Three Months Ended March 31,     Reported     Constant
Currency
 
         2014             2015          
     (dollars in millions)              

Software

   $ 217      $ 218        1     5

SaaS and cloud

     259        268        4     5

Services

     124        131        5     10
  

 

 

   

 

 

     

FS Revenue

$ 600    $ 617      3   6
  

 

 

   

 

 

     

FS Adjusted EBITDA

$ 139    $ 174      25   25

FS Adjusted EBITDA margin

  23.2   28.1   4.9   4.0

Revenue

In the first quarter of 2015, FS revenue grew 6% at constant currency driven by growth in Software, SaaS and cloud, and Services revenue. These results reflect the customer reception of our new technology offerings, continued growth in the emerging markets, and growth in the array of services that surround and support our software. In the first quarter of 2015 and 2014, Software revenue was 35% and 36%, respectively, SaaS and cloud revenue was 44% and 43%, respectively, and Services revenue was 21% of FS revenue.

FS Software revenue increased 5% at constant currency in the first quarter of 2015 from the prior-year period. Software revenue grew as a result of strong license sales of our latest technology to both new and existing

 

53


Table of Contents

customers. Reported software license fee revenue was $42 million, a $9 million, or 27% increase, from the prior-year period. Software license revenue increased 36% on a constant-currency basis.

FS SaaS and cloud revenue increased approximately 5% at constant currency in the first quarter of 2015 from the prior-year period. This growth was driven by increased volumes in our SaaS offerings and greater adoption of our cloud offerings, delivered from our private cloud.

FS Services revenue increased approximately 10% at constant currency in the first quarter of 2015 from the prior-year period primarily due to growth in professional services tied to our new technology offerings and increasing global reach, as customers increased their spending to implement our solutions and integrate them into their operating environments.

Revenue from emerging markets, comprised of China, India, Southeast Asia, the Middle East, Africa, Latin America and Eastern Europe, increased 20% in the first quarter of 2015 over the prior-year period, driven by strong sales of our technology. Revenue in established markets, comprised of the US, Western Europe, Japan and Australia, increased approximately 5% in the first quarter of 2015 over the prior-year period.

Adjusted EBITDA

FS Adjusted EBITDA was $174 million in the first quarter of 2015, an increase of 25% from the prior-year period. On a constant currency basis, FS adjusted EBITDA also increased 25% in the quarter. The FS Adjusted EBITDA margin was 28.1% and 23.2% for the first quarter of 2015 and 2014, respectively.

The FS Adjusted EBITDA margin increase was driven by the strength of our software and SaaS sales, improved professional services profitability, a $5 million decrease in employment-related, product development spending, and lower bad debt expense from the sale of a customer bankruptcy claim.

Public Sector & Education Segment

 

    

  

    Year-over-
Year Change
 
     Three Months Ended March 31,     Reported     Constant
Currency
 
         2014             2015          
     (dollars in millions)              

Software

   $ 34      $ 34        (1 )%      (1 )% 

SaaS and cloud

     9        9        4     4

Services

     10        11        4     4
  

 

 

   

 

 

     

PS&E Revenue

$ 53    $ 54      1   1
  

 

 

   

 

 

     

PS&E Adjusted EBITDA

$ 16    $ 16      (1 )%    (1 )% 

PS&E Adjusted EBITDA margin

  30.1   29.5   (0.6 )%    (0.6 )% 

Revenue

In the first quarter of 2015, total PS&E revenue grew 1% principally driven by growth in professional services and accompanied by increases in PS&E SaaS and cloud revenues. During the first quarters of 2015 and 2014, PS&E Software revenue comprised 62% and 64%, respectively, PS&E SaaS and cloud revenue was approximately 18% and 17%, respectively, and PS&E Services revenue was approximately 20% and 19%, respectively, of total PS&E revenue.

PS&E Software revenue decreased 1% primarily due to a decrease of approximately $0.5 million of software license fees, partially offset by annual software maintenance increases. PS&E SaaS and cloud revenue increased 4% primarily due to add-on cloud services to the existing customer base. PS&E Services revenue

 

54


Table of Contents

increased 4% due to continuing to deliver the contracted backlog resulting from new software license sales and product upgrades from 2013 and 2014 which generate related implementation and integration services. There is no business processing services revenue in this segment.

Adjusted EBITDA

In the first quarter of 2015, PS&E Adjusted EBITDA of $16 million was flat to the prior-year quarter. The PS&E Adjusted EBITDA margin declined by 0.6% during current-year quarter to 29.5% driven by higher professional services revenue and higher costs associated with the delivery of our professional services.

Corporate

Corporate spending, as measured on an adjusted EBITDA basis, increased by approximately $5 million to $15 million during the first quarter of 2015 mainly due to higher employee costs resulting from increased medical expenses.

Year Ended December 31, 2014 Compared to Year Ended December 31, 2013

Consolidated Results of Operations

 

    Year Ended December 31,     Year–over-Year Change  
          % of Revenue     As     At Constant  
(dollars in millions)   2013     2014       2013         2014       Reported     Currency  

Revenue

  $ 2,761      $ 2,809        100     100     2     2

Costs and expenses:

         

Cost of sales and direct operating

    1,045        1,098        38     39     5     5

Sales, marketing and administration

    634        667        23     24     5     5

Product development and maintenance

    392        376        14     13     (4 )%      (4 )% 

Depreciation

    104        107        4     4     3     3

Amortization of acquisition-related intangible assets

    182        136        7     5     (25 )%      (25 )% 

Trade name impairment

    —          339        0     12     nm        nm   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

  2,357      2,723      85   97   16   16
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

  404      86      15   3   (79 )%    (78 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income margin

  15   3   (11.6 )%    (11.5 )% 

Other income (expense):

Interest income

  1      1      0   0   0   0

Interest expense and amortization of deferred financing fees

  (326   (291   (12 )%    (10 )%    11   11

Loss on extinguishment of debt

  (6   (61   (0 )%    (2 )%    nm      nm   

Other income (expense)

  (2   —        (0 )%    0   nm      nm   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense)

  (333   (351   (12 )%    (12 )%    (5 )%    (6 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

  71      (265   3   (9 )%    nm      nm   

Benefit from (provision for) income taxes

  (26   57      (1 )%    2   nm      nm   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

  45      (208   2   (7 )%    nm      nm   

Income (loss) from discontinued operations, net of tax

  17      (14   1   (1 )%    nm      nm   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  62      (222   2   (8 )%    nm      nm   

Income attributable to non-controlling interests

  (169   (174   (6 )%    (6 )%    nm      nm   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to SunGard

$ (107 $ (396   nm      nm      nm      nm   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Financial Information

Adjusted EBITDA

$ 766    $ 765      27.7   27.2   0   0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Note: Columns may not total due to rounding

“nm” = not meaningful

 

55


Table of Contents

Revenue

For the year ended December 31, 2014, total revenue grew 2% on a constant currency basis to $2.8 billion. Our revenue growth was largely due to sales of our new technology, continued growth in the emerging markets, and growth in our Services revenue. In 2014 and 2013, Software revenue was approximately 40% and 41%, respectively, of total revenue, SaaS and cloud revenue was approximately 38% of total revenue in both years, and Services revenue was approximately 22% and 21%, respectively, of total revenue. Key drivers in our revenue categories are as follows:

 

    Software revenue was flat on a year-over-year basis driven by a 3% growth at constant currency of our software license revenue from strong customer acceptance of our latest technology, largely offset by reductions in certain legacy products, particularly in the established markets. Software revenue growth in emerging markets accelerated in the second half of 2014, driven by stronger maintenance revenue growth and the addition of a number of new customers.

 

    SaaS and cloud revenue grew 2% at constant currency year-over-year primarily driven by increased volumes in our SaaS offerings and greater adoption of our cloud offerings, delivered from our private cloud. The 2014 SaaS and cloud revenue year-over-year growth rate was negatively impacted by approximately 1% due to the sale of a $12 million customer bankruptcy claim in the third quarter of 2013.

 

    Services revenue increased approximately 4% at constant currency year-over-year primarily due to growth in professional services as customers increased spending to implement our software and integrate it into their operating environments.

Cost of Sales and Direct Operating

Cost of sales and direct operating expense was 39% and 38% of total revenue in 2014 and 2013, respectively. Cost of sales and direct operating expense increased $53 million, or 5%, at constant currency primarily due to the investments in increased delivery capacity to support our SaaS and cloud offerings and skilled resources to support our professional services growth.

Sales, Marketing and Administration

Sales, marketing and administration expense was 24% and 23% of total revenue in 2014 and 2013, respectively. Sales, marketing and administration expense increased $32 million, or 5%, at constant currency primarily due to a $12 million increase in spending primarily related to one-time expenses associated with the AS Split-Off, as well as from continued investments in sales resources.

Product Development and Maintenance

Product development and maintenance expense was 13% and 14% of total revenue in 2014 and 2013, respectively. Product development and maintenance expense decreased $15 million, or 4%, at constant currency primarily due to an $18 million increase in capitalized software related to our new technology investments.

Depreciation

Depreciation expense was 4% of total revenue in both 2014 and 2013. Depreciation expense increased 3% at constant currency primarily due to increased capitalization of software assets in the past year.

Amortization of Acquisition-Related Intangible Assets

Amortization of acquisition-related intangible assets was 5% and 7% of total revenue in 2014 and 2013, respectively. Amortization of acquisition-related intangible assets decreased 25% at constant currency due to the continued runoff of certain acquisition-related intangible assets primarily stemming from the LBO transaction in 2005.

 

56


Table of Contents

Trade Name Impairment

As a result of the AS Split-Off, we recognized a $339 million impairment of the carrying value of the SunGard trade name as of March 31, 2014. There was no trade name impairment during 2013. For further information, refer to “Goodwill and Trade Name Impairment Tests” included in “Use of Estimates and Critical Accounting Policies” elsewhere in this prospectus.

Operating Income

Operating income decreased 78% at constant currency to $87 million in 2014. Operating income was impacted by the items discussed above. Our operating margin decreased by 11.5% primarily due to a 12.0% margin reduction resulting from the $339 million trade name impairment charge, and a 0.4% margin reduction resulting from the $12 million increase in one-time expenses related to the AS Split-Off, partially offset by a 1.6% margin increase due to the runoff of certain acquisition-related intangible assets.

Adjusted EBITDA

Adjusted EBITDA for 2014 was $765 million, down $1 million from 2013. Our Adjusted EBITDA margin decreased 0.5% to 27.2% year-over-year. On a constant-currency basis, our Adjusted EBITDA margin decreased 0.4%, driven primarily by continued investments in sales resources, increased delivery capacity to support our SaaS and cloud offerings and skilled resources to support our professional services growth. Also impacting the year–to-year decline in Adjusted EBITDA margin for 2014 was the one-time gain associated with the sale of a customer bankruptcy claim in 2013.

Interest expense and amortization of deferred financing fees

Our interest expense was $291 million and $326 million for 2014 and 2013, respectively. The $35 million decrease in interest expense was due primarily to (i) approximately $10 million of non-capitalizable debt issuance expenses incurred in 2013 associated with the March 2013 refinancing of our senior secured credit facility, and (ii) lower interest expense in 2014 resulting from the repayment of debt in 2013 and the first quarter of 2014 prior to the Split-Off of Availability Services. Interest expense associated with the debt that was repaid or retired on March 31, 2014 in connection with the AS Split-Off is included in “Income (loss) from discontinued operations, net of tax” in the accompanying consolidated financial statements for all periods presented.

Loss on extinguishment of debt

Loss on extinguishment of debt was $61 million and $6 million for 2014 and 2013, respectively. The loss on extinguishment of debt in 2014 includes (i) a $36 million loss associated with the exchange of approximately $425 million of senior notes issued by Sungard Availability Services, Inc. (“SpinCo”) (“SpinCo Notes”) for approximately $389 million of senior notes due 2018 issued by SunGard Data Systems, Inc. (“SunGard Notes”) in connection with the AS Split-Off and (ii) the write-off of $25 million of deferred financing fees resulting from the repayment or retirement of debt during the first quarter. See Notes 1 and 5 to our consolidated financial statements included elsewhere in this prospectus. Loss on extinguishment of debt in 2013 primarily includes the write-off of deferred financing fees associated with the March 2013 refinancing of $2.2 billion of term loans.

Benefit from (provision for) income taxes

The effective income tax rates for 2014 and 2013 were a benefit of 22% and a provision of 36%, respectively. Our effective tax rate fluctuates from period to period due to changes in the mix of income or losses in jurisdictions with a wide range of tax rates, permanent differences between U.S. GAAP and local tax laws, certain one-time items including tax rate changes, and adjustments related to the repatriation of earnings from foreign subsidiaries, net of a U.S. foreign tax credit. For 2014, the benefit for income taxes includes a benefit of $138 million related to the impairment of the SunGard trade name, an expense of $48 million due to changes in certain state deferred tax

 

57


Table of Contents

rates, which are primarily driven by the change in the legal entity ownership of the SunGard trade name caused by the AS Split-Off, and an expense of $7 million to increase the valuation allowance on state net operating losses driven primarily by the change in management’s judgment of their realizability due to the AS Split-Off. Also in the fourth quarter of 2014, after weighing the positive and negative evidence required, we recorded a valuation allowance of $3 million against certain losses generated in France. These losses were larger than anticipated and exceeded the scheduled reversal of deferred tax liabilities. The tax benefit of the French losses totals $24 million at December 31, 2014 and have an indefinite carryforward period. In evaluating the realizability of our deferred tax assets, we considered the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected future taxable income, and for losses that do not have an indefinite carryforward period, tax planning strategies. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced or as the reversal of certain deferred tax liabilities continues.

Income (loss) from discontinued operations, net of tax

Income (loss) from discontinued operations, net of tax, was a loss of $(17) million in 2014 and was income of $17 million in 2013. On March 31, 2014, we completed the AS Split-Off. Income (loss) from discontinued operations reflects the results of our AS business and two smaller FS subsidiaries that were sold in January 2014. Included in loss from discontinued operations in 2014 is a gain on the sale of two FS businesses of approximately $22 million. Also included in loss from discontinued operations in 2014 is sponsor management fee expense of approximately $15 million payable under the Management Agreement for services related to the issuance of the $1.025 billion AS term loan and $425 million of SpinCo Notes in connection with the AS Split-Off.

Income attributable to the non-controlling interest

Accrued dividends on SCCII’s cumulative preferred stock totaled $174 million and $169 million for 2014 and 2013, respectively. The increase in accrued dividends is due to compounding of the cumulative, undeclared dividend, partially offset by the decrease in outstanding preferred shares resulting from the share exchange as part of the AS Split-Off. The preferred stock will be exchanged for shares of SunGard common stock as a result of this offering. See “Recapitalization.”

Segment Results of Operations

Financials Systems Segment

 

           Year-over-Year Change  
     Year ended December 31,     Reported     Constant
Currency
 
       2013             2014          
     (dollars in millions)              

Software

   $ 987      $ 988        0     0

SaaS and cloud

     1,021        1,040        2     2

Services

     543        564        4     4
  

 

 

   

 

 

     

FS Revenue

$ 2,551    $ 2,592      2   2
  

 

 

   

 

 

     

FS Adjusted EBITDA

$ 746    $ 742      (1 )%    0

FS Adjusted EBITDA margin

  29.2   28.6   (0.6 )%    (0.5 )% 

Revenue

In 2014, FS total revenue grew 2% at constant currency year-over-year driven by SaaS and cloud, and professional services. These results reflect the positive reception of our new technology offerings, particularly within our asset management, wealth management and treasury solutions, continued growth in the emerging markets, and growth in a broad array of services that surround and support our software. In 2014 and 2013, FS Software revenue was 38% and 39%, respectively, of FS total revenue, SaaS and cloud revenue was 40% of FS total revenue in each year and FS Services revenue was 22% and 21%, respectively, of FS total revenue.

 

58


Table of Contents

FS Software revenue was relatively unchanged on a constant currency basis in 2014. FS Software revenue grew as a result of our new technology offerings which resulted in revenue growth in both new and existing customers, offset by reductions in certain legacy products.

FS SaaS and cloud revenue increased 2% at constant currency in 2014 from 2013. This growth was driven by increased volumes from our existing customers and increased adoption of our SaaS and cloud offerings by new customers delivered from our private cloud. The 2014 year-to-year growth was negatively impacted by approximately 1% due to the sale of a $12 million customer bankruptcy claim in the third quarter of 2013.

FS Services revenue increased approximately 4% at constant currency in 2014 from 2013 primarily due to broad-based growth in professional services tied to our new technology offerings and increasing global reach, as customers increased their spending to implement our software and integrate it into their operating environments.

FS total revenue from emerging markets, comprised of China, India, Southeast Asia, the Middle East, Africa, Latin America and Eastern Europe, increased 8% at constant currency in 2014 driven by strong sales of our technology. FS revenue in established markets, comprised of the United States, Western Europe, Japan and Australia, increased approximately 1% at constant currency in 2014 over 2013.

Adjusted EBITDA

The FS Adjusted EBITDA margin of 28.6% in 2014 decreased by 0.5% at constant currency from 2013 driven by continued investments in sales resources, increased delivery capacity to support our SaaS and cloud offerings and skilled resources to support our professional services growth. Also impacting the year-to-year margin decline was the one-time gain associated with the sale of a customer bankruptcy claim in 2013 as discussed above.

Public Sector & Education Segment

 

           Year-over-Year Change  
     Year Ended December 31,     Reported     Constant
Currency
 
         2013             2014          
     (dollars in millions)              

Software

   $ 137      $ 138        1     1

SaaS and cloud

     36        37        6     6

Services

     37        42        12     12
  

 

 

   

 

 

     

PS&E Revenue

$ 210    $ 217      4   4
  

 

 

   

 

 

     

PS&E Adjusted EBITDA

$ 66    $ 68      2   2

PS&E Adjusted EBITDA margin

  31.6   31.1   (0.5 )%    (0.5 )% 

Revenue

In 2014, PS&E total revenue grew 4% year-over-year principally driven by growth in Services revenue and accompanied by more modest increases in Software, and SaaS and cloud revenues. In 2014 and 2013, Software revenue represented 64% and 65%, respectively, of total PS&E revenue, SaaS and cloud revenue was 17% of total PS&E revenue in each year, and Services revenue was 19% and 18%, respectively, of total PS&E revenue.

PS&E Software revenue increased 1% primarily due to annual price increases in our software maintenance arrangements, sales to new customers and add-on sales to existing customers. PS&E SaaS and cloud revenue increased 6% year-over-year primarily due to the full year impact from new sales in 2013, add-on cloud services to existing customers and annual price increases. PS&E Services revenue increased 12% year-over-year due to new software license sales and product upgrades which generated related implementation and integration services.

 

59


Table of Contents

Adjusted EBITDA

PS&E Adjusted EBITDA was $68 million, an increase of 2% from 2013. On a constant currency basis, PS&E Adjusted EBITDA also increased 2% in 2014. The PS&E Adjusted EBITDA margin was 31.1% and 31.6% for 2014 and 2013, respectively. The 0.5% margin decrease was driven by investments in services and development resources to accelerate customer delivery and drive future revenue growth, partially offset by increased capitalization of software development costs.

Corporate

Corporate spending, as measured on an adjusted EBITDA basis, decreased by approximately $1 million year-over-year to $45 million in 2014 mainly due to lower employee costs and reduced external services expenses. Corporate spending includes expenses for supporting functions such as corporate finance, human resources, and legal that are shared across our reporting segments.

Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

Consolidated Results of Operations

 

     Year Ended December 31,     Year-over-Year Change  
                 % of Revenue              
(dollars in millions)    2012     2013         2012             2013         As Reported     At Constant
Currency
 

Revenue

   $ 2,808      $ 2,761        100     100     (2 )%      (2 )% 

Costs and expenses:

          

Cost of sales and direct operating

     1,082        1,045        39     38     (3 )%      (3 )% 

Sales, marketing and administration

     643        634        23     23     (1 )%      (1 )% 

Product development and maintenance

     422        392        15     14     (7 )%      (7 )% 

Depreciation

     96        104        3     4     9     9

Amortization of acquisition-related intangible assets

     217        182        8     7     (17 )%      (17 )% 

Trade name impairment

     —          —          0     0     0     0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

  2,460      2,357      88   85   (4 )%    (4 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

  348      404      12   15   16   12
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income margin

  12   15   2.3pts      1.7pts   

Other income (expense):

Interest income

  1      1      0   0   0   0

Interest expense and amortization of deferred financing fees

  (360   (326   (13 )%    (12 )%    9   9

Loss on extinguishment of debt

  (82   (6   (3 )%    (0 )%    93   93

Other income (expense)

  1      (2   0   (0 )%    (293 )%    (281 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense)

  (440   (333   (16 )%    (12 )%    24   24
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

  (92   71      (3 )%    3   177   161

Benefit from (provision for) income taxes

  49      (26   2   (1 )%    (153 )%    (153 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

  (43   45      (2 )%    2   204   169

Income (loss) from discontinued operations, net of tax

  (23   17      (1 )%    1   173   175
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  (66   62      (2 )%    2   194   171

Income attributable to non-controlling interests

  (251   (169   (9 )%    (6 )%    nm      nm   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to SunGard

$ (317 $ (107   nm      nm      nm      nm   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Financial Information

Adjusted EBITDA

$ 749    $ 766      26.7   27.7   2   0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Note: Columns may not total due to rounding.

“nm” = not meaningful

 

60


Table of Contents

Revenue

 

For the year ended December 31, 2013, total revenue of $2.8 billion declined 2% on a constant currency basis from 2012. The revenue decline was largely due to customer attrition, including customer bankruptcies and mergers. In addition, SunGard exited certain lower-margin and legacy product lines as we refocused our product portfolio. Finally, a portion of the revenue reduction was due to lower professional services revenue, following completion of certain large projects in 2012. These decreases were partially offset by the impact of a one-time benefit associated with the sale of a $12 million customer bankruptcy claim in 2013.

In 2013 and 2012, Software revenue was 41% and 40%, respectively, of total revenue, SaaS and cloud revenue was 38% and 39%, respectively, of total revenue and Services revenue was 21% of total revenue in each year. Key drivers in our revenue categories are as follows:

 

    In 2013, our Software revenue increased over 2012 due to new license sales of certain products, particularly in the emerging markets. In addition, Software revenue benefitted from an acquisition in the fourth quarter of 2012. These increases in Software revenue were offset by reductions in certain legacy products.

 

    SaaS and cloud revenue decreased approximately 3% at constant currency in 2013 from the prior year due primarily to customer attrition, some of which was the result of customer bankruptcies and mergers. The decreases in SaaS and cloud revenue were partially offset by the one-time benefit associated with the sale of a $12 million customer bankruptcy claim in 2013.

 

    Services revenue decreased approximately 4% at constant currency in 2013 from the prior year due primarily to a reduction in professional services reflecting the completion of certain large projects in 2012, partially offset by the recognition of significant customer milestones in the fourth quarter of 2013.

Cost of Sales and Direct Operating

Cost of sales and direct operating expense was 38% and 39% of total revenue in 2013 and 2012, respectively. Cost of sales and direct operating expense decreased $32 million in 2013, or 3%, at constant currency over 2012 primarily due to a decrease in lower margin services revenue and reductions in spending related to our cross-company cost savings initiatives.

Sales, Marketing and Administration

Sales, marketing and administration expense was 23% of total revenue in each of 2013 and 2012. Sales, marketing and administration expense decreased $5 million in 2013, or 1%, at constant currency over 2012 primarily due to a decrease in severance and facility closure costs and lower administrative spending, partially offset by continued investments in sales resources.

Product Development and Maintenance

Product development and maintenance expense was 14% and 15% of total revenue in 2013 and 2012, respectively. Product development and maintenance expense decreased $28 million in 2013, or 7%, at constant currency over 2012 primarily due to a shift in spending from certain slower growing products to new technologies, which resulted in an increase in capitalized software development.

Depreciation

Depreciation expense was 4% and 3% of total revenue in 2013 and 2012, respectively. Depreciation expense increased 9% at constant currency year-over-year primarily due to increased capitalization of software assets in the past year.

 

61


Table of Contents

Amortization of Acquisition-Related Intangible Assets

Amortization of acquisition-related intangible assets was 7% and 8% of total revenue in 2013 and 2012, respectively. Amortization of acquisition-related intangible assets decreased 17% at constant currency year-over-year due to the continued runoff of certain acquisition-related intangible assets primarily stemming from the LBO transaction in 2005.

Operating Income

Operating income increased 12% at constant currency year-over-year to $404 million in 2013. Operating income was impacted by the items discussed above. Our operating income margin increased by 1.7% year-over-year primarily due to the 1.3% margin improvement in 2013 from the decrease in amortization of acquisition-related intangible assets, a 0.9% margin increase in 2013 from the $25 million decrease in severance and facility closure costs, and a 1.1% margin increase in 2013 due to a shift in spending from certain slower growing products to new technologies, which resulted in an increase in capitalized software development, partially offset by a 0.6% margin decrease in 2013 from the combined $16 million increase in depreciation due to increases in capitalized software and stock compensation expense.

Adjusted EBITDA

Adjusted EBITDA for 2013 of $766 million was flat on a constant currency basis to 2012. Our Adjusted EBITDA margin increased by 0.5% at constant currency to 27.7% in 2013 from the prior year driven primarily by improvements in our administrative and development spending related to initiatives to exit certain slower growing products and shift our investments to new technologies. This shift also led to an increase in capitalized software, further reducing in period development spending.

Interest expense and amortization of deferred financing fees

During 2012 and 2013, we refinanced approximately $3.2 billion of debt, taking advantage of the attractive debt markets, and repaid certain higher-cost senior notes. As a result, interest expense decreased to $326 million in 2013 from $360 million in 2012.

Loss on extinguishment of debt

The refinancing and repayments of debt described above resulted in a loss on extinguishment of debt of $6 million in 2013 and $82 million in 2012. The loss on extinguishment of debt in 2013 includes the loss related to the March 2013 refinancing of $2.2 billion of term loans. The loss on extinguishment of debt in 2012 is driven by the early extinguishment of our senior notes due 2015, our senior subordinated notes due 2015 and the partial repayment of term loans in January and December 2012.

Benefit from (provision for) income taxes

The effective income tax rates for 2013 and 2012 were a provision of 36% and a benefit of 53%, respectively. Our effective tax rate fluctuates from period to period due to changes in the mix of income or losses in jurisdictions with a wide range of tax rates, permanent differences between U.S. GAAP and local tax laws, certain one-time items including tax rate changes, and adjustments related to the repatriation of earnings of foreign subsidiaries, net of a U.S. foreign tax credit.

Income (loss) from discontinued operations, net of tax

Income (loss) from discontinued operations, net of tax, was $17 million in 2013 and $(23) million in 2012. On March 31, 2014, we completed the AS Split-Off. During 2012, we sold our Higher Education business (“HE”) and an FS subsidiary. Also during 2012, we recorded a combined gain on the sales of two businesses of $571 million and a goodwill impairment charge of $385 million. See Note 3 to our consolidated financial statements included elsewhere in this prospectus.

 

62


Table of Contents

Income attributable to the non-controlling interest

Income (loss) attributable to the non-controlling interest represents accrued dividends on SCCII’s cumulative preferred stock. The amount of accrued dividends was $169 million and $251 million in 2013 and 2012, respectively. The decrease in accrued dividends is due to the declaration and payment of a $718 dividend in December 2012, partially offset by compounding.

Segment Results of Operations

Financials Systems Segment

 

           Year-over-Year Change  
     Year Ended December 31,     Reported     Constant
Currency
 
(dollars in millions)        2012             2013          

Software

   $ 982      $ 987        1     0

SaaS and cloud

     1,051        1,021        (3 )%      (3 )% 

Services

     571        543        (5 )%      (5 )% 
  

 

 

   

 

 

     

FS Revenue

$ 2,604    $ 2,551      (2 )%    (2 )% 
  

 

 

   

 

 

     

FS Adjusted EBITDA

$ 727    $ 746      3   1

FS Adjusted EBITDA margin

  27.9   29.2   1.3   0.8

Revenue

In 2013, FS total revenue declined 2% from 2012 due to customer attrition, including customer bankruptcies and mergers. In addition, we exited certain lower-margin or legacy product lines as we refocused our product portfolio. Finally, a portion of the revenue reduction was due to lower professional services revenue, following completion of certain large projects in 2012. These decreases were partially offset by the impact of a one-time benefit associated with the sale of a $12 million customer bankruptcy claim in 2013. In 2013 and 2012, FS Software revenue was approximately 39% and 38%, respectively, of FS total revenue, FS SaaS and cloud revenue was approximately 40% of FS total revenue in each year and FS Services revenue was approximately 21% and 22%, respectively, of FS total revenue.

FS Software revenue was relatively unchanged in 2013. In 2013, our software license revenue increased due to new license sales of certain products, particularly in the emerging markets. In addition, during 2013, FS Software revenue benefitted from an acquisition in the fourth quarter of 2012. These increases in FS Software revenue were offset by reductions in certain legacy products.

FS SaaS and cloud revenue decreased approximately 3% in 2013 from the prior year primarily due to customer attrition, some of which was the result of customer bankruptcies and mergers. The decreases in FS SaaS and cloud revenue were partially offset by the sale of a $12 million customer bankruptcy claim in 2013.

FS Services revenue decreased approximately 5% in 2013 from the prior year due primarily to a reduction in professional services reflecting the completion of certain large customer projects in 2012, partially offset by achieving significant customer milestones in the fourth quarter of 2013.

Revenue from emerging markets, comprised of China, India, Southeast Asia, the Middle East, Africa, Latin America and Eastern Europe, increased 8% in 2013 over 2012, driven by strong sales of our technology. Revenue in established markets, comprised of the US, Western Europe, Japan and Australia, decreased approximately 3% in 2013 over 2012.

 

63


Table of Contents

Adjusted EBITDA

FS Adjusted EBITDA of $746 million in 2013 increased by 1% at constant currency from the prior year. FS Adjusted EBITDA margin increased by 0.8% at constant currency to 29.2% in 2013 from the prior year. The margin expansion in 2013 was primarily due to the impact of various cost saving and productivity initiatives implemented during 2012 and 2013, and from improvements in our development initiatives by exiting certain slower growing products or markets and shifting our investments to address the faster growing products. This also resulted in increased capitalized software, further reducing in-period development expense.

Public Sector and Education Segment

 

           Year-over-Year Change  
     Year Ended December 31,     Reported     Constant
Currency
 
(dollars in millions)        2012             2013          

Software

   $ 135      $ 137        1     1

SaaS and cloud

     33        36        7     7

Services

     36        37        4     4
  

 

 

   

 

 

     

PS&E Revenue

$ 204    $ 210      3   3
  

 

 

   

 

 

     

PS&E Adjusted EBITDA

$ 66    $ 66      0   0

PS&E Adjusted EBITDA margin

  32.5   31.6   (0.9 )%    (0.9 )% 

Revenue

PS&E revenue grew 3% in 2013 from 2012 reflecting an increase in sales of our Public Sector solutions. In 2013 and 2012, PS&E Software revenue was approximately 65% and 66%, respectively, of total PS&E revenue, PS&E SaaS and cloud revenue was approximately 17% and 16%, respectively, of total PS&E revenue and PS&E Services revenue was approximately 18% of total PS&E revenue in each year.

Demand for our solutions drove a 1% increase in Software revenue, a 7% increase in PS&E SaaS and cloud revenue and a 4% increase in PS&E Services revenue in 2013.

Adjusted EBITDA

PS&E Adjusted EBITDA was $66 million in 2013, unchanged from the prior year. PS&E Adjusted EBITDA margin declined 0.9% from 2012 to 31.6% in 2013. The 0.9% margin reduction was driven by an increase in incentive compensation payments due to higher sales, and an increase in professional service personnel to reduce our backlog and accelerate customer start dates.

Corporate

Corporate spending, as measured on an adjusted EBITDA basis, increased by approximately $2 million to $46 million during 2013 primarily due to higher employee costs.

Non-GAAP Financial Measures

We evaluate our performance using both GAAP and non-GAAP financial measures. Non-GAAP measures are not based on any comprehensive set of accounting rules or principles and should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP. In addition, SunGard’s non-GAAP measures may be different from non-GAAP measures used by other companies.

 

64


Table of Contents

Our primary non-GAAP measure is Adjusted EBITDA, whose corresponding GAAP measure is net income (loss). We define Adjusted EBITDA as net income (loss) less income (loss) from discontinued operations, income taxes, loss on extinguishment of debt, interest expense and amortization of deferred financing fees, depreciation (including the amortization of capitalized software), amortization of acquisition-related intangible assets, trade name and goodwill impairment charges, severance and facility closure charges, stock compensation expense, management fees from our Sponsors, and certain other non-recurring expenses.

We believe Adjusted EBITDA is an effective tool to measure our operating performance since it excludes non-cash items and certain variable charges that do not relate to business performance. We use Adjusted EBITDA extensively to measure our financial performance, and also to report our results to our board of directors. We use a similar measure, which we refer to as Covenant Compliance Adjusted EBITDA, for purposes of computing our debt covenants. See “—Liquidity and Capital Resources—Covenant Compliance.”

While Adjusted EBITDA and similar measures are frequently used as measures of operations and the ability to meet debt service requirements, these terms are not necessarily comparable to other similarly titled captions of other companies due to the potential inconsistencies in the method of calculation. Adjusted EBITDA does not reflect the impact of earnings or charges resulting from matters that we may consider not to be indicative of our ongoing operations. In particular, our definition of Adjusted EBITDA adds back certain noncash, extraordinary or unusual charges that are deducted in calculating net income (loss). However, these are expenses that may recur, vary greatly and are difficult to predict. Further, our debt instruments require that Adjusted EBITDA be calculated for the most recent four fiscal quarters. As a result, the measure as calculated under our debt instruments can be disproportionately affected by a particularly strong or weak quarter. Adjusted EBITDA may not be comparable to the measure for any subsequent four-quarter period or any complete fiscal year. Adjusted EBITDA should not be considered as an alternative to cash flows from operating activities, as a measure of liquidity or as an alternative to operating income or net income as indicators of operating performance.

The following table presents a reconciliation of Adjusted EBITDA, a non-GAAP measure, to net income (loss), which is the nearest comparable GAAP measure.

 

     Year Ended December 31,     Three Months Ended
March 31,
 
(dollars in millions)        2012             2013             2014             2014             2015      

Net income (loss)

   $ (66   $ 62      $ (222   $ (340   $ 28   

Income (loss) from discontinued operations

     (23     17        (14     (17     2   

Benefit from (provision for ) income taxes

     49        (26     57        101        (18

Loss on extinguishment of debt(a)

     (82     (6     (61     (61     —     

Interest expense and amortization of deferred financing fees

     (360     (326     (291     (74     (71

Other Income

     2        (1     1        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

  348      404      86      (289   115   

Depreciation(b)

  96      104      107      24      29   

Amortization of acquisition-related intangible assets

  217      182      136      43      21   

Trade name impairment charge

  —        —        339      339      —     

Restructuring charges(c)

  42      17      27      5      2   

Stock compensation expense

  31      39      42      9      10   

Management fees

  9      8      9      2      2   

Other costs (included in operating income)(d)

  6      12      19      12      (4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

$ 749    $ 766    $ 765    $ 145    $ 175   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

Loss on extinguishment of debt includes in 2012 the write-off of deferred financing fees associated with the January 2012 repayment of $1.22 billion of our U.S. Dollar-denominated term loans, the April 2012

 

65


Table of Contents
  retirement of $500 million, 10.625% senior notes due 2015, the December 2012 retirement of $1 billion, 10.25% senior subordinated notes due 2015 and the December 2012 repayment of $217 million of U.S. Dollar-denominated term loans. Loss on extinguishment of debt for 2014 primarily includes (i) a $36 million loss associated with the exchange of SpinCo Notes for SunGard Notes and (ii) the write-off of deferred financing fees associated with (a) the repayment of $1.005 billion of term loans and the retirement of $389 million of senior notes due 2018, both resulting from the AS Split-Off (see Note 1 and Note 5 of Notes to Consolidated Financial Statements), (b) the $250 million reduction of the revolving credit facility and (c) the repayment of $60 million of the accounts receivable facility term loans.
(b) Includes amortization of capitalized software.
(c) Restructuring charges includes severance and related payroll taxes and reserves to consolidate certain facilities.
(d) Other costs include strategic initiative expenses, certain expenses associated with acquisitions made by the Company, and foreign currency gains and losses.

Our business is organized into two segments, FS and PS&E. Corporate spending is held above the segments as noted in the table below. Corporate spending includes support functions such as corporate finance, human resources, and legal. The following table details Adjusted EBITDA for each of our two reportable segments and corporate spending to reconcile to total SunGard Adjusted EBITDA, as reconciled above.

 

     Adjusted EBITDA  
     Year Ended December 31,     Three Months Ended March 31,  
(dollars in millions)        2012             2013             2014             2014             2015      

FS

   $ 727      $ 746      $ 742      $ 139      $ 174   

PS&E

     66        66        68        16        16   

Corporate

     (44     (46     (45     (10     (15
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

$ 749    $ 766    $ 765    $ 145    $ 175   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

66


Table of Contents

Quarterly Financial Data

The following tables set forth our unaudited consolidated statement of operations for each of the nine quarters in the period ended March 31, 2015. The unaudited quarterly statement of operations set forth below have been prepared on the same basis as our audited consolidated financial statements. Our historical results are not necessarily indicative of future operating results. Because the data in these tables are only a summary and do not provide all of the data contained in our consolidated financial statements, the information should be read in conjunction with the “Selected Historical Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial condition and Results of Operations,” and our consolidated financial statements and related notes thereto included elsewhere in this prospectus.

 

    Three Months Ended  
(dollars in millions, except per share data)   Mar. 31,
2013
    June 30,
2013
    Sep. 30
2013
    Dec. 31
2013
    Mar. 31
2014
    June 30,
2014
    Sep. 30
2014
    Dec. 31
2014
    Mar. 31,
2015
 

Revenue

  $ 639      $ 672      $ 678      $ 772      $ 653      $ 673      $ 691      $ 792      $ 671   

Cost of sales and direct operating(1)

    267        258        251        269        269        273        280        276        268   

Sales, marketing and administration

    152        156        155        171        168        158        168        173        152   

Product development and maintenance

    105        95        98        94        99        97        90        90        86   

Depreciation

    24        25        24        31        24        27        28        28        29   

Amortization of acquisition-related intangible assets

    48        47        43        44        43        41        30        22        21   

Trade name impairment charge

    —          —          —          —          339        —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

  596      581      571      609      942      596      596      589      556   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

  43      91      107      163      (289   77      95      203      115   

Income (loss) before income taxes

  (52   10 (2)    29 (2)(3)    84      (424 )(4)    5      22 (5)    132      44   

Income (loss) from continuing operations

  (35   5 (2)    22 (2)(3)    53      (323 )(4)    3      11 (5)    101      26   

Income (loss) from discontinued operations

  (12   10      1      18      (17   —        3      2   

Net income (loss)

  (47   15 (2)    23 (2)(3)    71      (340 )(4)    3      11 (5)    104      28   

Income attributable to non-controlling interest

  (25   (47   (49   (48   (50   (40   (42   (42   (43

Net income (loss) attributable to SunGard

  (72   (32 )(2)    (26 )(2)(3)    23      (390 )(4)    (37   (31 )(5)    62      (15

Basic earnings (loss) per share:

Net income (loss) per share—Basic:

Class L stockholders

$ 7.13    $ 7.70    $ 7.79    $ 8.05    $ 8.14    $ 8.80    $ 8.90    $ 9.20    $ 9.29   

Class A stockholders—continuing operations

  (1.02   (1.02   (0.97   (0.88   (2.34   (1.12   (1.11   (0.80   (1.10

Class A stockholders—total

  (1.07   (0.98   (0.97   (0.81   (2.40   (1.12   (1.11   (0.79   (1.09

Diluted earnings (loss) per share:

Net income (loss) per share—Diluted:

Class L stockholders

$ 7.13    $ 7.70    $ 7.79    $ 8.05    $ 8.14    $ 8.80    $ 8.90    $ 9.20    $ 9.29   

Class A stockholders—continuing operations

  (1.02   (1.02   (0.97   (0.88   (2.34   (1.12   (1.11   (0.80   (1.10

Class A stockholders—total

  (1.07   (0.99   (0.97   (0.81   (2.40   (1.12   (1.11   (0.79   (1.09

Other financial data:

Adjusted EBITDA

$ 129    $ 181    $ 195    $ 261    $ 145    $ 160    $ 188    $ 272    $ 175   

 

67


Table of Contents

The following table presents a reconciliation of income (loss) from continuing operations to Adjusted EBITDA for each of the periods indicated:

 

    Three Months Ended  
(dollars in millions)   Mar. 31,
2013
    June 30,
2013(2)
    Sep. 30
2013(3)
    Dec. 31
2013(2)
    Mar. 31
2014(4)
    June 30,
2014
    Sep. 30
2014(5)
    Dec. 31
2014
    Mar. 31,
2015
 

Net income (loss)

  $ (47   $ 15      $ 23      $ 71      $ (340   $ 3      $ 11      $ 104      $ 28   

Income (loss) from discontinued operations, net of tax

    (12     10        1        18        (17     —          —          3        2   

Provision for (benefit from) income taxes

    17        (5     (7     (31     101        (2     (11     (31     (18

Loss on extinguishment of debt

    (5     —          (1     —          (61     —          —          —          —     

Interest expense and amortization of deferred financing fees

    (90     (79     (78     (79     (74     (73     (73     (71     (71

Other income (expense), net

    —          (2     1        —          —          1        —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

  43      91      107      164      (289   77      95      203      115   

Depreciation

  24      25      24      31      24      27      28      28      29   

Amortization of acquisition-related intangible assets

  48      47      43      44      43      41      30      22      21   

Trade name impairment charge

  —        —        —        —        339      —        —        —        —     

Restructuring charges(6)

  1      2      6      8      5      2      17      3      2   

Stock compensation expense

  9      11      10      9      9      11      13      9      10   

Management fees

  1      2      2      3      2      1      3      3      2   

Other costs (included in operating income)(7)

  3      3      3      3      12      —        2      4      (4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

$ 129    $ 181    $ 195    $ 261    $ 145    $ 159    $ 188    $ 272    $ 175   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Cost of sales and direct operating expenses represents the cost of providing our software and services offerings to customers and excludes depreciation, amortization and the cost of maintenance.
(2) During the second quarter of 2013, we completed a review of our accounting practices related to vacation pay obligations. In countries where the vacation policy stipulated that vacation days earned in the current-year must be used in that same year, we adjusted our quarterly estimate of accrued vacation costs to better match expense recognition with amounts payable to employees when leaving the Company. The impact of the change in estimate was an aggregate decrease to costs and expenses of $10 million in the quarter ended June 30, 2013. The impact of this change was negligible for the full year since the balance would have naturally reversed, with a substantial majority of that reversal occurring during the fourth quarter.
(3) SunGard received approximately $12 million in proceeds related to a bankruptcy claim assigned and sold to a third party in the third quarter of 2013. The claim related to an FS customer that filed for Chapter 11 bankruptcy in January 2013. The amount of the claim represented previously reserved revenue, which now has been recognized, and a termination charge related to the customer contract.
(4) Includes a $339 million impairment charge of the trade name asset (see Note 1 of Notes to Consolidated Financial Statements) and a $61 million loss on extinguishment of debt (see Note 5 of Notes to Consolidated Financial Statements).
(5) During the three months ended September 30, 2014, the Company recorded a $17 million severance charge related to a workforce reduction plan to reduce headcount by approximately 3% of the total workforce.
(6) Restructuring charges includes severance and related payroll taxes and reserves to consolidate certain facilities.
(7) Other costs include strategic initiative expenses, certain expenses associated with acquisitions made by the Company, and gain/loss on foreign exchange.

 

68


Table of Contents

Liquidity and Capital Resources

Our liquidity, a non-GAAP measure, was as follows for the periods indicated:

 

(dollars in millions)    (Pre AS Split-Off)
December 31, 2013
     (Post AS Split-Off)
March 31, 2014
     December 31,
2014
     March 31,
2015
 

Cash and cash equivalents

   $ 706       $ 355       $ 447       $ 555   

Capacity: Revolving Credit Facility

     831         591         592         593   

Capacity: Receivables Facility

     46         15         39         43   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Liquidity

$ 1,583    $ 961    $ 1,078    $ 1,191   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liquidity represents the amount of cash and readily available sources of cash. We use total liquidity to ensure we have an adequate amount of funds to meet our obligations.

Our cash and cash equivalents totaled $555 million at March 31, 2015. Approximately $261 million was held by our wholly-owned non-U.S. subsidiaries that is available to fund operations and strategic investment opportunities abroad. Also, approximately $39 million is related to our broker/dealer operations, some of which is not readily available for general corporate use. The remaining cash and cash equivalents of $255 million was held by our wholly-owned U.S. subsidiaries and is available for general corporate use.

Our cash and cash equivalents totaled $447 million at December 31, 2014. Approximately $196 million was held by our wholly-owned non-U.S. subsidiaries that is available to fund operations and strategic investment opportunities abroad. Also, approximately $43 million is related to our broker/dealer operations, some of which is not readily available for general corporate use. The remaining cash and cash equivalents of $208 million was held by our wholly-owned U.S. subsidiaries and is available for general corporate use.

We believe our cash flows in the United States continue to be sufficient to fund our current domestic operations and obligations, including financing activities such as debt service. In addition, we have several options available to improve liquidity in the short term in the United States, including repatriation of funds from foreign subsidiaries, borrowing funds under our revolving credit facilities, and calling intercompany loans that are in place with certain foreign subsidiaries. To the extent we elect to repatriate the earnings of our foreign subsidiaries, significant additional cash taxes could be payable. See Note 13 to our consolidated financial statements included elsewhere in this prospectus.

Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014

Cash Flow from Operations

Cash flow from continuing operations was $154 million for the three months ended March 31, 2015, an increase of $68 million from the prior-year period. The increase in 2015 cash flow from continuing operations was primarily due to improved operating performance during the first quarter of 2015, non-recurring transaction costs incurred during the first quarter of 2014 related to the AS Split-Off , and higher working capital contributions during the first quarter of 2015 mainly due to a reduction of accounts receivable tied to improved collections, and higher annual incentive payments paid in the first quarter of 2014 related to 2013 financial performance.

Cash Flow from Investing Activities

Net cash used by continuing operations in investing activities was $32 million in the three months ended March 31, 2015, comprised mainly of $28 million of cash paid for property and equipment and capitalized software development and $4 million paid for an acquisition of a business included in our FS segment. This

 

69


Table of Contents

compares to $28 million in the three months ended March 31, 2014, comprised mainly of cash paid for property and equipment and capitalized software development costs. Capitalized software development costs, which reflect investments in our software solutions, increased $2 million in the first quarter of 2015 to $15 million from the prior-year period.

Cash Flow from Financing Activities

Net cash used by continuing operations in financing activities was $4 million for the three months ended March 31, 2015, primarily related to payments of employee taxes from the net distribution of share-based awards to employees. Net cash used by continuing operations in financing activities was $1,338 million for the three months ended March 31, 2014, primarily related to repayment of $1,005 million of term loans as part of the AS Split-Off, repayment of our $250 million senior secured notes due 2014 and $60 million of our receivables facility term loan, and repayment of $7 million of our tranche A term loan.

Year Ended December 31, 2014 Compared to Year Ended December 31, 2013

Cash Flow from Operations

Cash flow from continuing operations was $332 million in 2014, a decrease of $90 million versus 2013. In late 2012, we instituted a series of working capital initiatives largely focused on improving accounts receivable collections. These initiatives, which generated a significant benefit to our 2013 working capital, did not provide the same level of benefit during 2014. In addition, 2014 working capital was negatively impacted by higher annual incentive payments in 2014 related to 2013 financial performance, as well as from transaction costs incurred in 2014 associated with the AS Split-Off. These items were partially offset by lower interest payments in 2014 resulting from the repayment of debt in 2013 and the first quarter of 2014 prior to the Split-Off of Availability Services.

Cash Flow from Investing Activities

Net cash used by continuing operations in investing activities is primarily comprised of cash paid for property and equipment and capitalized software development, as well as cash paid to acquire businesses. In 2014, cash paid by continuing operations for investing activities increased by $35 million to $147 million primarily due to a $21 million increase in capitalized software development costs related to our product investments, as well as investments to increase hosting and cloud capacity on a global basis. We have been shifting our investment strategy to new product development initiatives to address the faster growing products, services and geographic markets. The remainder of the increase was primarily due to $7 million of purchased software and a $4 million increase related to the purchase of computer and telecommunications equipment.

Cash Flow from Financing Activities

In 2014, net cash from continuing operations used in financing activities was $1.355 billion, which included the repayment of $1.005 billion of term loans as part of the AS Split-Off, $250 million senior secured notes, $60 million of our receivables facility term loan and $7 million of our tranche A term loan that matured in February 2014. In 2013, net cash from continuing operations used in financing activities was $325 million, which included refinancing $2.2 billion of term loans, additional repayments of $224 million of term loans and repayment of $50 million of our receivables facility revolver.

Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

Cash Flow from Operations

Cash flow from continuing operations in 2013 was $422 million, an increase of $135 million versus 2012. The improvement in cash flow from operations in 2013 was primarily due to lower interest expense resulting

 

70


Table of Contents

from the repayment of $1.2 billion of debt using the proceeds from the sale of HE in January 2012, and the repayment of $500 million of 10.625% senior unsecured notes in April 2012. Additionally, 2013 cash flow from operations benefited from improved operating results and from working capital initiatives largely focused on improving accounts receivable collections. These benefits were partially offset by a one-time benefit in 2012 from exiting certain lower margin services in our Broker/Dealer business which required significant cash reserves.

Cash Flow from Investing Activities

In 2013, cash paid by continuing operations for investing activities decreased by $24 million from 2012 to $112 million primarily due to a $38 million decrease in cash paid for businesses acquired and a $5 million decrease in capital expenditures related to the purchase of computer and telecommunications equipment, partially offset by a $19 million increase in capitalized software development costs. We have been very selective in our acquisition strategy, spending $2 million in 2013 for one acquisition and $40 million in 2012 for two acquisitions.

Cash Flow from Financing Activities

In 2013, net cash from continuing operations used in financing activities was $325 million, which included refinancing $2.2 billion of term loans, additional repayments of $224 million of term loans and repayment of $50 million of our receivables facility revolver. In 2012, net cash from continuing operations used in financing activities was $2.04 billion, which included the repayment of $1.22 billion of term loans resulting from the sale of HE, $1.02 billion to repurchase and redeem $1 billion of senior subordinated notes due 2015, a $724 million preferred stock dividend, $527 million to redeem the 10.625% senior notes due 2015 and $217 million of optional prepayments of term loans. These financing outflows were partially offset by the issuance of $1 billion of senior subordinated notes due 2019 and a $720 million term loan to fund the dividend.

 

71


Table of Contents

Debt

As a result of our acquisition on August 11, 2005 by funds associated with our Sponsor and certain co-investors, we are highly leveraged. Total debt outstanding as of December 31, 2013, March 31, 2014 (post AS Split-Off), December 31, 2014 and March 31, 2015 consists of the following:

 

(dollars in millions)   (pre AS
Split-Off)
December 31,
2013
    (post AS
Split-Off)
March 31,
2014
    December 31,
2014
    March 31,
2015
 

Senior Secured Credit Facilities:

       

Secured revolving credit facility due March 8, 2018

  $ —        $ —        $ —        $ —     

Tranche A due February 28, 2014, effective interest rate of 1.92%

    7        —          —          —     

Tranche C due February 28, 2017, effective interest rates of 4.41%, 4.44%, 4.44% and 4.44%

    427        400        400        400   

Tranche D due January 31, 2020, effective interest rate of 4.50%

    713        —          —          —     

Tranche E due March 8, 2020, effective interest rates of 4.10%, 4.31%, 4.31% and 4.31%

    2,183        1,918        1,918        1,918   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Senior Secured Credit Facilities

  3,330      2,318      2,318      2,318   

Senior Secured Notes due 2014 at 4.875%

  250      —        —     

Senior Notes due 2018 at 7.375%

  900      511      511      511   

Senior Notes due 2020 at 7.625%

  700      700      700      700   

Senior Subordinated Notes due 2019 at 6.625%

  1,000      1,000      1,000      1,000   

Secured accounts receivable facility, at 3.67%, 3.66%, 3.16% and 3.18%

  200      140      140      140   

Other, primarily foreign bank debt and capital lease obligations

  4      2      —        1   
 

 

 

   

 

 

   

 

 

   

 

 

 

Debt—continuing operations

  6,384      4,671      4,669      —     

Debt—discontinued operations

  8      —        —        —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total debt

$ 6,392    $ 4,671    $ 4,669    $ 4,670   
 

 

 

   

 

 

   

 

 

   

 

 

 

Leverage Metric per Credit Agreement

  4.56   5.42   5.41   5.04

Weighted Average Interest Rate

  5.42   5.63   5.61   5.62

Percent Fixed Rate (swap adjusted)

  54   67   67   67

Percent Bonds of Total Debt

  45   47   47   47

At March 31, 2015, contingent purchase price obligations that depend upon the operating performance of certain acquired businesses were a potential of $6 million, of which approximately $0.3 million is accrued. We also have outstanding letters of credit and bid bonds that total approximately $17 million.

We expect our available cash balances and cash flows from operations, combined with availability under the revolving credit facility and receivables facility, to provide sufficient liquidity to fund our current obligations, projected working capital requirements and capital spending for a period that includes at least the next 12 months.

Our ability to make dividend payments to our equity holders is governed by the covenants in our debt documents. Without obtaining an amendment to those documents, our covenants currently limit such a dividend to a total of $200 million.

 

72


Table of Contents

At December 31, 2013, March 31, 2014 (post AS Split-Off), December 31, 2014 and March 31, 2015, the contractual future maturities of debt of continuing operations were as follows:

 

(dollars in millions)    (pre AS
Split-Off)
December 31,
2013
     (post AS
Split-Off)
March 31,
2014
     December 31,
2014
     March 31,
2015
 

2014

   $ 290       $ —         $ —         $ —     

2015

     29         2         —           1   

2016

     29         —           —           —     

2017

     656         540         400         400   

2018

     929         511         511         511   

2019

     1,029         1,000         1,140         1,140   

Thereafter

     3,422         2,618         2,618         2,618   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 6,384    $ 4,671    $ 4,669    $ 4,670   
  

 

 

    

 

 

    

 

 

    

 

 

 

See Notes 1 and 5 to our consolidated financial statements included elsewhere in this prospectus.

In 2012, 2013 and 2014, we restructured our debt in light of the attractive credit markets. Specifically, we have extended our maturities, lowered our interest rates, removed the financial maintenance covenants with respect to our term loan facility and used interest rate swaps to manage the amount of floating rate debt in order to reduce our exposure to variable rate interest payments.

Senior Secured Credit Facilities

We had $592 million of available borrowing capacity and $8 million of outstanding letters of credit under our $600 million revolving credit facility as of December 31, 2014. In addition, we had $4 million of letters of credit outstanding at December 31, 2014 that did not impact availability under the revolving credit facility.

On February 7, 2014, we amended and restated our Amended and Restated Credit Agreement dated as of August 11, 2005, as amended and restated from time to time (“Credit Agreement”) to, among other things, (a) amend certain covenants and other provisions of the Credit Agreement in order to permit the AS Split-Off, including (i) the ability to effect the split-off without requiring an initial public offering, (ii) permitting AS to incur up to $1.5 billion of indebtedness in connection with the split-off, and (iii) requiring SunGard’s total secured leverage ratio (less cash and Cash Equivalents in excess of $50 million), after giving pro forma effect to the split-off, to increase no more than 0.60x of Covenant Compliance Adjusted EBITDA at the time of the AS Split-Off; and (b) amend certain covenants and other provisions in order to, among other things (i) modify the financial maintenance covenant included therein, and (ii) permit us and our affiliates to repurchase term loans under the Credit Agreement subject to certain restrictions.

On February 28, 2014, we repaid the remaining $7 million tranche A term loan under the Credit Agreement. On March 31, 2014 in connection with the AS Split-Off, we used the $1,005 million net cash proceeds we received from SpinCo from the issuance of a SpinCo term loan facility to repay approximately $27 million of our tranche C term loan, $713 million of our tranche D term loan and $265 million of our tranche E term loan, in each case, under the Credit Agreement.

The tranche E term loan and the revolving credit commitments under the Credit Agreement are subject to certain springing maturities such that (a) the tranche E term loan will mature on March 8, 2020 unless (i) all but $250,000,000 in aggregate principal amount of the 2018 Notes are not repaid in full or extended, renewed or refinanced on or prior to August 16, 2018, which refinancing will not mature or require any scheduled amortization or payments of principal prior to the date that is 91 days after March 8, 2020, in which case the tranche E term loan will mature on August 16, 2018 or (ii) all but $250,000,000 in aggregate principal amount of the Senior Subordinated Notes are not repaid in full or extended, renewed or refinanced on or prior to August 2,

 

73


Table of Contents

2019, which refinancing will not mature or require any scheduled amortization or payments of principal prior to the date that is 91 days after March 8, 2020, in which case the tranche E term loan will mature on August 2, 2019 and (b) the revolving credit commitments will mature on March 8, 2018, unless all but $250,000,000 in aggregate principal amount of the tranche C term loans under the Credit Agreement are not repaid in full or extended, renewed or refinanced on or prior to November 29, 2016, which refinancing will not mature or require any scheduled amortization or payments of principal prior to the date that is 91 days after March 8, 2018, in which case the revolving credit commitments will mature on November 29, 2016.

Secured Accounts Receivable Facility

We also maintain a secured accounts receivables facility, which consists of an outstanding term loan of $140 million and a revolving credit commitment of $60 million as of December 31, 2014. At December 31, 2014, $364 million of accounts receivable secured the borrowings under the receivables facility, and no amount was drawn on the revolving commitment. During January 2014, we removed AS sellers in the accounts receivable facility and, as a result, we repaid $60 million of the term loan component which permanently reduced the facility limit. The impact of removing AS sellers and the resulting $60 million repayment of the term loan had the effect of reducing the amount available for borrowing to an aggregate of $200 million, which is comprised of a $140 million term loan and a $60 million revolving credit commitment.

The receivables facility contains certain covenants. We are required to satisfy and maintain specified facility performance ratios, financial ratios and other financial condition tests.

On May 14, 2014, we amended and restated our secured accounts receivable facility in order to, among other things, (i) extend the maturity date from December 19, 2017 to May 14, 2019 and (ii) reduce the applicable margin on the advances under the facility from 3.50% for LIBOR advances and 2.50% for base rate advances to 3.00% and 2.00%, respectively.

Interest Rate Swaps

We use interest rate swap agreements to manage the amount of our floating rate debt in order to reduce our exposure to variable rate interest payments associated with the senior secured credit facilities. We pay a stream of fixed interest payments for the term of the swaps, and in turn, receive variable interest payments based on one-month LIBOR or three-month LIBOR (0.17% and 0.26%, respectively, at December 31, 2014). The net receipt or payment from the interest rate swap agreements is included in interest expense. As of December 31, 2014, including the impact of our outstanding interest rate swaps, the composition of our debt was 67% fixed and 33% floating. A summary of our interest rate swaps at December 31, 2014 follows (dollars in millions):

 

Inception

   Maturity    Notional
Amount
(dollars
in millions)
     Interest rate
paid
    Interest
rate
received
(LIBOR)
 

August-September 2012

   February 2017    $ 400         0.69     1-Month   

June 2013

   June 2019      100         1.86     3-Month   

September 2013

   June 2019      100         2.26     3-Month   

February-March 2014

   March 2020      300         2.27     3-Month   
     

 

 

      
$ 900      1.52
     

 

 

      

 

74


Table of Contents

Contractual Obligations

At December 31, 2014, our contractual obligations follow:

 

(dollars in millions)    Total      2015      2016      2017      2018-2019      Thereafter  

Short-term and long-term debt(1)

   $ 4,669       $ —         $ —         $ 400       $ 1,651       $ 2,618   

Interest payments(1)(2)

     1,323         269         271         257         451         75   

Operating leases

     231         62         56         45         47         21   

Purchase obligations(3)

     123         94         19         6         4         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 6,346    $ 425    $ 346    $ 708    $ 2,153    $ 2,714   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) We intend to use the net proceeds from this offering to reduce debt. We estimate that this will reduce our annual interest expense by approximately $         million.
(2) Interest payments consist of interest on both fixed-rate and variable-rate debt. Variable-rate debt consists primarily of the tranche E term loan facility ($1,418 million at 4.00%), and the secured accounts receivable facility ($140 million at 3.16%), each as of December 31, 2014. See Note 5 to our consolidated financial statements included elsewhere in this prospectus.
(3) Purchase obligations include our estimate of the minimum outstanding obligations under noncancelable commitments to purchase goods or services.

Gross reserves for uncertain tax positions approximated $104 million as of December 31, 2014. We believe it is more-likely-than-not that the uncertain tax positions for which a benefit has been recognized are sustainable, based solely on their technical merits and consideration of the relevant taxing authority’s widely understood administrative practices and precedents. However, we have only recorded the portion of these tax benefits that are greater than fifty percent likely to be realized upon settlement with the taxing authority. To the extent that the relevant taxing authority disagrees with our positions it may result in a future cash outlay, which is not included in the contractual obligations table above. See Note 13 to our consolidated financial statements included elsewhere in this prospectus.

At December 31, 2014, contingent purchase price obligations that depend upon the operating performance of certain acquired businesses were $6 million, of which approximately $0.5 million is included in other long-term liabilities. We also have outstanding letters of credit and bid bonds that total approximately $19 million.

We expect our available cash balances and cash flows from operations, combined with availability under the revolving credit facility and receivables facility, to provide sufficient liquidity to fund our current obligations, projected working capital requirements and capital spending for a period that includes at least the next 12 months.

Depending on market conditions, SunGard, its Sponsors and their affiliates may from time to time repurchase debt securities issued by SunGard, in privately negotiated or open market transactions, by tender offer or otherwise.

Covenant Compliance

As of March 31, 2015, we were in compliance with all financial and nonfinancial covenants. In connection with the March 2013 senior secured credit agreement amendment, as further amended in February 2014, we removed the financial maintenance covenants for the term loan facility and modified the financial maintenance covenants for the senior secured revolving credit facility. As amended, the financial maintenance covenant is applicable at quarter end only if there is an amount outstanding under the revolving credit facility (minus the lesser of (i) the amount of outstanding letters of credit issued under the Credit Agreement and (ii) $25 million) that is greater than or equal to 25% of the total revolving commitments available under the credit facility (see footnote 1 below for further details). If applicable, starting with the quarter ended March 31, 2015, the financial maintenance covenant allows a maximum total leverage ratio to Covenant Compliance Adjusted EBITDA of 6.00x at the end of such quarter through December 31, 2015 and 5.75x thereafter.

 

75


Table of Contents

The Credit Agreement and the indentures governing our senior notes due 2018 and 2020 and our senior subordinated notes due 2019 contain various covenants that limit our ability to engage in specified types of transactions. These covenants limit our ability to, among other things:

 

    incur additional indebtedness or issue certain preferred shares;

 

    pay dividends on, repurchase or make distributions in respect of our capital stock or make other restricted payments;

 

    make certain investments;

 

    sell certain assets;

 

    create liens;

 

    consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and

 

    enter into certain transactions with our affiliates.

If the financial maintenance covenant in the revolving credit facility were to apply and we failed to satisfy such covenant, then a default solely of the revolving credit facility would occur. If the revolving credit lenders fail to waive such default, then the revolving credit lenders could elect (upon a determination by a majority of the revolving credit lenders) to terminate their commitments and declare all amounts borrowed under the revolving credit facility due and payable. If this happens, all amounts borrowed under the senior secured term loan facilities would be due and payable as well. This acceleration would also result in a default under the indentures.

Under the indentures governing SunGard’s senior notes due 2018 and 2020 and senior subordinated notes due 2019 and SunGard’s senior secured credit agreement, our ability to incur additional indebtedness, make investments and pay dividends remains tied to a leverage or fixed charge ratio based on SDS’s Covenant Compliance Adjusted EBITDA. Covenant Compliance Adjusted EBITDA, in our credit facilities, is defined as EBITDA, which we define as earnings before interest, taxes, depreciation and amortization, further adjusted to exclude certain adjustments permitted in calculating covenant compliance under the indentures and senior secured credit facilities. Credit Agreement Adjusted EBITDA is a non-GAAP measure used to determine our compliance with certain covenants contained in the indentures governing the senior notes due 2018 and 2020 and senior subordinated notes due 2019 and in our senior secured credit agreement. We believe that the inclusion of supplementary adjustments to EBITDA applied in presenting Covenant Compliance Adjusted EBITDA are appropriate to provide additional information to investors to demonstrate compliance with the financing covenants.

Covenant Compliance Adjusted EBITDA does not represent net income (loss) or cash flow from operations as those terms are defined by GAAP and does not necessarily indicate whether cash flows will be sufficient to fund cash needs. While Covenant Compliance Adjusted EBITDA and similar measures are frequently used as measures of operations and the ability to meet debt service requirements, these terms are not necessarily comparable to other similarly titled captions of other companies due to the potential inconsistencies in the method of calculation. Covenant Compliance Adjusted EBITDA does not reflect the impact of earnings or charges resulting from matters that we may consider not to be indicative of our ongoing operations. In particular, the definition of Covenant Compliance Adjusted EBITDA in the indentures allows us to add back certain noncash, extraordinary or unusual charges that are deducted in calculating net income (loss). However, these are expenses that may recur, vary greatly and are difficult to predict. Further, our debt instruments require that Covenant Compliance Adjusted EBITDA be calculated for the most recent four fiscal quarters. As a result, the measure can be disproportionately affected by a particularly strong or weak quarter. Further, it may not be comparable to the measure for any subsequent four-quarter period or any complete fiscal year. Covenant Compliance Adjusted EBITDA is similar, but not identical, to Adjusted EBITDA used to measure our performance. Adjusted EBITDA should not be considered as an alternative to cash flows from operating activities, as a measure of liquidity or as an alternative to operating income or net income as indicators of operating performance. See Note 11 to our unaudited condensed consolidated financial statements found elsewhere in this prospectus and Note 15 to our consolidated financial statements found elsewhere in this prospectus.

 

76


Table of Contents

SunGard Data Systems Inc. Adjusted EBITDA Reconciliation

The following is a reconciliation for SunGard Data Systems Inc. of income (loss) from continuing operations, which is a GAAP measure of our operating results, to Covenant Compliance Adjusted EBITDA as defined in our debt agreements. This is similar, but not identical, to Adjusted EBITDA used for segment reporting as disclosed earlier. The terms and related calculations are defined in the credit agreement. The outstanding debt relates to SunGard Data Systems Inc., a wholly owned, indirect subsidiary of SunGard. The amounts in the table below relate to SunGard Data Systems Inc. and may be different than comparable amounts for SunGard due to certain expenses that are borne directly by SunGard.

 

     Year Ended
December 31,
    Three Months Ended
March 31,
     Last Twelve
Months Ended
March 31,
 
(dollars in millions)    2012     2013      2014         2014             2015          2015  

Income (loss) from continuing operations

   $ (43   $ 46       $ (207   $ (323   $ 26       $ 142   

Interest expense, net

     359        325         290        74        71         287   

Provision for (benefit from) income taxes

     (49     26         (57     (101     18         62   

Depreciation

     96        104         107        24        29         112