-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K8foV6O9LjSJVfixu4uXFE9YIQi7AoX/Yt7VkLkJGBubT57d6ECBPUi4UJZS4nek EidNgTXDyfYJQD3cHv3ApQ== 0000927016-99-003045.txt : 19990818 0000927016-99-003045.hdr.sgml : 19990818 ACCESSION NUMBER: 0000927016-99-003045 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19990817 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SS&C TECHNOLOGIES INC CENTRAL INDEX KEY: 0001011661 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 061169696 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 000-28430 FILM NUMBER: 99694219 BUSINESS ADDRESS: STREET 1: 80 LAMBERTON RD STREET 2: CORPORATE PLACE CITY: WINDSOR STATE: CT ZIP: 06095 BUSINESS PHONE: 8602427887 MAIL ADDRESS: STREET 1: CORPORATE PLACE STREET 2: 705 BLOOMFIELD AVE CITY: BLOOMFIELD STATE: CT ZIP: 06002 10-Q/A 1 FORM 10-Q/A AMENDMENT NO. 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A Amendment No. 1 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________________ to __________________ Commission File Number 000-28430 SS&C TECHNOLOGIES, INC. (Exact name of Registrant as specified in its charter) DELAWARE (State or other jurisdiction of incorporation or organization) 06-1169696 (I.R.S. Employer Identification No.) 80 Lamberton Road, Windsor, Connecticut 06095 (Address of principal executive offices and Zip Code) 860-298-4500 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Number of shares outstanding of the issuer's classes of common stock as of April 30, 1998: Class Number of Shares Outstanding ----- ---------------------------- Common Stock, par value $.01 per share 14,490,319 SS&C TECHNOLOGIES, INC. INDEX PART I. FINANCIAL INFORMATION Page Number ----------- Item 1. Financial Statements Consolidated Condensed Balance Sheets at December 31, 1997 and March 31, 1998 3 Consolidated Condensed Statements of Operations for the three-month periods ended March 31, 1997 and 1998 4 Consolidated Condensed Statements of Cash Flows for the three-month periods ended March 31, 1997 and 1998 5 Notes to Consolidated Condensed Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 16 SIGNATURE 17 EXHIBIT INDEX 18 This Amendment No. 1 to Quarterly Report on Form 10-Q/A contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects" and similar expressions are intended to identify forward-looking statements. The important factors discussed below under the caption "Certain Factors That May Affect Future Operating Results," among others, could cause actual results to differ materially from those indicated by forward-looking statements made herein and presented elsewhere by management from time to time. EXPLANATORY NOTE This Amendment No. 1 to Quarterly Report on Form 10-Q/A amends and restates Items 1 and 2 of Part I and Item 6 of Part II of the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, as filed by the Registrant on May 15, 1998 and is being filed to reflect the restatement of the Registrant's Consolidated Condensed Financial Statements. See "Restatement of Quarterly Financial Statements" in Note 1 of the Notes to the Consolidated Condensed Financial Statements for the discussion of the basis for such restatement. 2 PART 1--FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS SS&C TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (in thousands)
March 31, Dec. 31, 1998 1997 -------- -------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 12,102 $ 23,660 Marketable securities 40,330 35,058 Accounts receivable, net 11,630 7,591 Unbilled accounts receivable, net 7,176 5,472 Income taxes 2,435 1,157 Other 736 1,563 -------- -------- Total current assets 74,409 74,501 -------- -------- Property and equipment, net 4,928 4,018 Unbilled accounts receivable - related party 368 420 Unbilled accounts receivable, net 812 828 Intangible assets, net 8,450 2,336 Deferred income taxes 5,113 3,205 -------- -------- Total assets $ 94,080 $ 85,308 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt - related party $ 216 $ 668 Current portion of long-term debt -- 313 Accounts payable 2,489 1,440 Accrued bonus payable -- 1,663 Deferred licensing and professional services revenues 1,676 1,618 Accrued expenses 2,891 4,077 Deferred maintenance revenues 12,022 7,528 -------- -------- Total current liabilities 19,294 17,307 -------- -------- Long-term debt - related party 250 250 -------- -------- Total liabilities 19,544 17,557 -------- -------- Stockholders' equity: Common stock 159 137 Additional paid-in capital 78,508 69,089 Accumulated deficit (4,131) (1,475) -------- -------- Total stockholders' equity 74,536 67,751 -------- -------- Total liabilities and stockholders' equity $ 94,080 $ 85,308 ======== ========
See accompanying notes to Consolidated Condensed Financial Statements. 3 SS&C TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (unaudited) (in thousands, except per share information)
Three months ended March 31, March 31, 1998 1997 -------- -------- Revenues: Software licenses $ 5,794 $ 3,004 Maintenance 3,207 2,155 Professional services 2,589 2,371 -------- -------- Total revenues 11,590 7,530 -------- -------- Cost of revenues: Software licenses 271 275 Maintenance 772 836 Professional services 1,786 1,456 -------- -------- Total cost of revenues 2,829 2,567 -------- -------- Gross profit 8,761 4,963 Operating expenses: Selling and marketing 3,819 2,198 Research and development 2,839 2,249 General and administrative 1,445 1,062 Write-off of purchased in-process research and development 5,387 -- -------- -------- Total operating expenses 13,490 5,509 -------- -------- Operating loss (4,729) (546) Interest and other income, net 592 449 -------- -------- Loss before income taxes (4,137) (97) Provision (benefit) for income taxes (1,481) 70 -------- -------- Net loss $ (2,656) $ (167) ======== ======== Basic loss per share $ (0.19) $ (0.01) ======== ======== Basic weighted average number of common Shares outstanding 13,887 13,418 ======== ======== Diluted loss per share $ (0.19) $ (0.01) ======== ======== Diluted weighted average number of common and common equivalent shares outstanding 13,887 13,418 ======== ========
See accompanying notes to Consolidated Condensed Financial Statements. 4 SS&C TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (unaudited) (in thousands)
Three months ended March 31, March 31, 1998 1997 -------- -------- Cash flows from operating activities: Net loss $ (2,656) $ (167) Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Depreciation and amortization 516 462 Purchased in-process research and development 5,387 -- Deferred income taxes (1,908) -- Provision for doubtful accounts 168 79 Changes in operating assets and liabilities, net of acquisition effects: Accounts receivable (62) 1,205 Unbilled accounts receivable (1,636) 358 Other current assets 890 (161) Accounts payable (451) 23 Accrued expenses (2,957) (699) Deferred revenues 2,257 1,323 Income taxes (1,278) (7) -------- -------- Total adjustments 926 2,583 -------- -------- Net cash (used in) provided by operating (1,730) 2,416 activities -------- -------- Cash flows from investing activities: Additions to other assets (1,432) (64) Cash paid for Quantra acquisition (2,281) -- Additions to property and equipment (753) (321) Investments in marketable securities, net (5,272) 4,737 -------- -------- Net cash (used in) provided by investing activities (9,738) 4,352 -------- -------- Cash flows from financing activities: Exercise of options 675 65 Transfer of cash from restricted cash equivalents -- 505 Repayment of debt (765) (409) -------- -------- Net cash provided by (used in) financing activities (90) 161 -------- -------- Net decrease in cash and cash equivalents (11,558) 6,929 Cash and cash equivalents, at beginning of period 23,660 36,286 -------- -------- Cash and cash equivalents, at end of period $ 12,102 $ 43,215 ======== ========
Supplemental disclosure of non-cash investing activities: As more fully described in Note 3, effective March 20, 1998, the Company purchased substantially all of the assets of Quantra Corporation for $15.0 million. See accompanying notes to Consolidated Condensed Financial Statements. 5 SS&C TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Condensed Financial Statements (unaudited) 1. Summary of Significant Accounting Policies: Basis of Presentation In the opinion of the Company, the accompanying unaudited consolidated condensed financial statements contain all adjustments (consisting of only normal recurring adjustments, except as noted elsewhere in the notes to the consolidated condensed financial statements) necessary to present fairly its financial position as of March 31, 1998 and the results of its operations for the three months ended March 31, 1997 and 1998. These statements are condensed and therefore do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The statements should be read in conjunction with the consolidated financial statements and footnotes as of and for the year ended December 31, 1997 included in the Company's Form 10-K filed with the Securities and Exchange Commission. The December 31, 1997 consolidated condensed balance sheet data were derived from audited financial statements, but do not include all disclosures required by generally accepted accounting principles. The results of operations for the three months ended March 31, 1998 are not necessarily indicative of the results to be expected for the full year. Basic and Diluted Earnings Per Share The Company adopted Statement of Financial Accounting Standards No. 128, Earnings Per Share, in 1997. Basic earnings per share includes no dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. The standard also requires companies with complex capital structures to disclose diluted earnings per share and, among other things, a reconciliation of the numerator and denominator for purposes of the calculation. Diluted earnings per share is computed based on net income (loss) divided by the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares comprise stock options using the treasury stock method. Common equivalent shares are excluded from the computation if their effect is antidilutive. Outstanding options to purchase 1.3 million and 2.1 million shares at March 31, 1997 and March 31, 1998, respectively, were not included in the computation of diluted earnings per share because the effect of including the options would be antidilutive. Comprehensive Loss The Company adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS No. 130"), effective January 1, 1998. SFAS No. 130 requires that items defined as comprehensive income, such as foreign currency translation adjustments, be separately classified in the financial statements and that the accumulated balance of other comprehensive income be reported separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. There were no material differences between net loss and comprehensive loss for the three months ended March 31, 1997 and 1998. Accounting Standards In June 1997, Statement of Financial Accounting Standards No. 131, Reporting Comprehensive Income ("SFAS No. 131") was issued. SFAS No. 131 requires public companies to report all financial and descriptive information about operating segments in their financial statements and requires selected information about operating segments to be reported in interim financial reports issued to shareholders. Operating segment financial information is required to be reported on the basis that is used internally for evaluating segment performance and allocation of resources. SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997 and requires presentation of comparative information for prior periods presented. SFAS No. 131 does not need to be applied to interim financial statements in 1998. The adoption of SFAS No. 131 is expected to impact the way the Company reports information about its operating segments. The Company adopted Statement of Position No. 97-2, Software Revenue Recognition ("SOP 97-2"), which is effective in fiscal years beginning after December 15, 1997. Retroactive application of the provisions of SOP 97-2 from the previously issued SOP on software revenue recognition is prohibited. The adoption of SOP 97-2 did not have a material impact on the Company's business, financial condition, and results of operations. 6 Restatement of Quarterly Financial Statements The Company believes that the amounts recorded as in-process research and development (IPR&D) charges at the dates of the acquisition of Quantra were measured in a manner consistent with widely recognized appraisal practices that were being utilized at the time of the acquisition. Subsequent to the acquisition, in a letter dated September 15, 1998 to the American Institute of Certified Public Accountants, the Chief Accountant of the Securities and Exchange Commission (SEC) expressed views of the SEC staff that took issue with certain appraisal practices employed in the determination of the fair value of IPR&D that was the basis of the Company's measurement of its IPR&D charge. Accordingly, the Company has resolved to adjust the amount originally allocated to acquired IPR&D in a manner to reflect the SEC staff's. This revised allocation was completed in March 1999. The effect of this revised allocation was to increase the allocation of the purchase price to completed technology and to decrease the allocation of the purchase price to purchased in-process technology as reported in the table below.
As reported As Restated (in thousands) ----------------------------- Tangible net assets $ 4,633 $ 4,633 Purchased in-process research and development 7,489 5,387 Purchased complete technology 3,169 5,271 ------- ------- $15,291 $15,291
The Company originally recorded a one-time charge for IPR&D in its operating results for the first quarter of 1998 in the amount of approximately $7.3 million. After revaluing the IPR&D charge, the Company adjusted the one-time charge to $5.4 million, representing a reduction of $1.9 million to be amortized in subsequent periods as completed technology. The following tables outline the revisions to previously reported unaudited Consolidated Financial Statements (in thousands of dollars, except per share data). Consolidated Condensed Balance Sheet:
March 31, 1998 Previously As Reported Restated -------- -------- Intangible assets, net $ 6,578 $ 8,450 Deferred income taxes 5,673 5,113 Accumulated deficit (5,443) (4,131)
Consolidated Condensed Statements of Operations:
Three months ended March 31, 1998 Previously As Reported Restated -------- -------- Operating expenses: Write-off of purchased in-process research and development $ 7,259 $ 5,387 Total operating expenses 15,362 13,490 Operating loss (6,601) (4,729) Income loss before income taxes (6,009) (4.137) Benefit from income taxes (2,041) (1,481) Net loss (3,968) (2,656) Basic loss per share $ (0.29) $ (0.19) Diluted loss per share $ (0.29) $ (0.19)
7 2. Commitments and Contingencies: On March 18, 1997 and April 8, 1997, two separate purported class action lawsuits ("Complaints") were filed against the Company, certain of its officers and the two leading managers of the Company's initial public offering. On July 8, 1997, a Consolidated Amended Class Action Complaint was filed in the United States District Court for the District of Connecticut (the "Consolidated Complaint") in which the Complaints were consolidated and amended. The Consolidated Complaint claims that the Prospectus for the Company's initial public offering allegedly made material misrepresentations in violation of Sections 11 and 12(2) of the Securities Act of 1933. On May 7, 1999, the Company announced that it had entered into an agreement that provides for the settlement of the consolidated securities class action lawsuit pending against the Company. The settlement provides that all claims against the Company, certain of its officers and directors and underwriters will be dismissed. Under the terms of the settlement, in exchange for the dismissal and release of all claims, the Company will pay to the class $7.5 million in cash, together with shares of Common Stock of the Company valued at $1.3 million. The Company will record a charge of approximately $9.3 million, including legal fees, in the quarter ended June 30, 1999. The settlement is subject to certain customary conditions, including notice to the class and approval by the Court. 3. Acquisitions: On March 20, 1998, the Company completed its acquisition (the "Quantra Acquisition") of substantially all of the assets of Quantra Corporation ("Quantra") pursuant to an Asset Purchase Agreement, dated as of March 20, 1998, among the Company, Quantra and AEGON USA Realty Advisors, Inc., the sole stockholder of Quantra. The purchase price for the Quantra Acquisition consisted of 546,019 unregistered shares of the Company's Common Stock, $2.3 million in cash and the assumption of certain liabilities of Quantra of $4.1 million, plus the costs of effecting the transaction. The Company and Quantra also entered into an Escrow Agreement pursuant to which an additional $1.2 million will be held in escrow to reimburse the Company in connection with certain acquisition costs and the breaches of representations, warranties or covenants, if any, by Quantra. The Quantra Acquisition was accounted for as a purchase and, accordingly, the net assets and results of operations of Quantra have been included in the consolidated condensed financial statements from the acquisition date. The purchase price was allocated to tangible and intangible assets based on their fair market value on the date of the acquisition. The following summarizes the allocation of the purchase price of the Quantra Acquisition (in thousands): Accounts receivable $ 4,145 Equipment and furniture 425 Other assets 63 Complete technology 5,271 Incomplete technology 5,387 ------- Total purchase price $15,291
The allocation to complete technology is based on future risk-adjusted cash flows. Complete technology has been capitalized and included in the caption "Intangible assets, net" in the accompanying consolidated condensed balance sheets. Complete technology will be amortized over two to four years based on the ratio that current gross revenues of the products bears to the total of current and anticipated future gross revenues of the products or the straight-line method, whichever is shorter. The allocation to incomplete technology is also based on future risk-adjusted cash flows and has been expensed in 1998, in accordance with generally accepted accounting principles. The incomplete technology had not achieved technological feasibility and had no alternative uses. For the Quantra Acquisition, the Company developed revenue projections over a five-to-six year period in three categories: license, maintenance and consulting. License revenue projections were based on expected unit sales over the projected lives of the respective product lines. The other categories of revenue were generally estimated as a percentage of total license revenues and ranged from 15% to 20% for maintenance and from 10% to 30% for consulting, depending on the product. Expense assumptions were based on the imposition of the Company's cost structure on the acquired technologies and products. The discount rates for the Quantra in-process research and development projects were 23% and 28%. On April 9, 1998, the Company completed its acquisition (the "Savid Acquisition") of the outstanding shares of Savid International Inc. and The Savid Group, Inc. (together "Savid") pursuant to a Stock Purchase Agreement, dated as of April 9, 1998, between the Company, Savid and the sole stockholder ("Stockholder") of Savid. The purchase price for the Savid Acquisition consisted of $821,500. An additional cash payment of $750,000 shall be paid provided that the aggregate revenues, as defined in the Stock Purchase Agreement, for the period from and including April 15, 1998 through and including April 14, 2001 are greater than or equal to $3,000,000. Also, in connection with the Savid Acquisition, the Company has agreed to pay royalty payments equal to 10% of the license fees with respect to the Savid System to the Stockholder during the five-year period ending April 14, 2003. The Company also entered into an employment agreement with the Stockholder and one other key employee of Savid for a period of three years. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THREE MONTHS ENDED March 31, 1997 and 1998 Revenues The Company's revenues are derived from software licenses and related maintenance and professional services. Total revenues increased 54% from $7.5 million in the three months ended March 31, 1997 to $11.6 million in the three months ended March 31, 1998. Software Licenses. Software license revenues increased 93% from $3.0 million in the three months ended March 31, 1997 to $5.8 million in the three months ended March 31, 1998. The increase in software license revenues was primarily due to an increase in CAMRA software license revenues, both domestically and internationally. Domestic CAMRA license revenues increased 56% from $1.6 million in the three months ended March 31, 1997 to $2.5 million in the three months ended March 31, 1998. International CAMRA software license revenues increased 207% from $358,000 in the three months ended March 31, 1997 to $1.1 million in the three months ended March 31, 1998. The remaining increase in software license revenues was attributable to revenues associated with the products acquired in connection with the Quantra Acquisition and an increase in the license revenues from the Company's Shepro Braun products. Maintenance. Maintenance revenues increased 49% from $2.2 million in the three months ended March 31, 1997 to $3.2 million in the three months ended March 31, 1998. The increase was primarily due to an increase in the Company's installed base of clients with maintenance contracts as a result of the Company's license sales for all products. The largest increases are due to the CAMRA clients, both domestically and internationally, and the Shepro Braun products. Professional Services. Professional services revenues increased 9% from $2.4 million in the three months ended March 31, 1997 to $2.6 million in the three months ended March 31, 1998. The increase was primarily due to the increase in demand for the Company's implementation, conversion and training services for CAMRA, both domestically and internationally, and an increase in the Company's outsourcing business. The increase in these areas was partially offset by the decrease in implementation services for the Shepro Braun products and a decrease in the actuarial consulting practice. Cost of Revenues Total cost of revenues increased 10% from $2.6 million in the three months ended March 31, 1997 to $2.8 million in the three months ended March 31, 1998. The gross profit increased from 66% for the three months ended March 31, 1997 to 76% for the three months ended March 31, 1998, primarily due to an increase in the software license revenues. Software license revenues carry the highest gross profit of all of the Company's sources of revenue. The increase in the overall gross profit was primarily attributable to the large increase in software license revenues without a corresponding increase in the cost of software licenses. Cost of Software Licenses. Cost of software license revenues relates primarily to royalties, as well as to the costs of product media, packaging, documentation and labor involved in the distribution of the Company's software. The cost of software licenses decreased 1% from $275,000 in the three months ended March 31, 1997 to $271,000 in the three months ended March 31, 1998. The cost of software license revenues as a percentage of such revenues decreased from 9% in the three months ended March 31, 1997 to 5% in the three months ended March 31, 1998. The 1998 cost of software license revenues was lower than the 1997 cost of software license revenues primarily due to the decrease in third-party hardware and software costs associated with the sales of the Shepro Braun products. Cost of Maintenance. Cost of maintenance revenues primarily consists of technical customer support and development costs associated with product and regulatory updates. The cost of maintenance revenues decreased 8% from $836,000 in the three months ended March 31, 1997 to $772,000 in the three months ended March 31, 1998. The cost of maintenance revenues as a percentage of such revenues decreased from 39% in the three months ended March 31, 1997 to 24% in the three months ended March 31, 1998. Costs associated with CAMRA, FILMS and PTS products remained relatively stable between the two quarterly periods. The decrease was primarily attributable to a decrease in costs associated with the Shepro Braun products due to a reallocation of resources from the support group to the professional services group due to an increase in demand for installation services. Cost of Professional Services. Cost of professional services revenues consists primarily of the cost related to personnel utilized to provide implementation, conversion and training services to the Company's software licensees, as well as custom programming, system integration and actuarial consulting services. The cost of professional services revenues increased 23% from $1.5 million in the three months ended March 31, 1997 to $1.8 million in the three months ended March 31, 1998. The cost of professional services revenues as a percentage of such revenues increased from 61% in the three months ended March 31, 1997 to 69% in the three months ended March 31, 1998. The increase in the cost of professional services was primarily attributable to an increase in personnel costs and processing fees in SS&C Direct and an increase in personnel costs associated with providing the CAMRA implementation, conversion and training services. 9 Operating Expenses Selling and Marketing. Selling and marketing expenses consist primarily of the cost of personnel associated with the selling and marketing of the Company's products, including salaries, commissions, and travel and entertainment. Such expenses also include the cost of branch sales offices, advertising, trade shows, marketing and promotional materials. Selling and marketing expenses increased 74% from $2.2 million in the three months ended March 31, 1997 to $3.8 million in the three months ended March 31, 1998. Selling and marketing expenses for the three months ended March 31, 1997 and 1998 represented 29% and 33%, respectively, of total revenues for those periods. The increase in selling and marketing expenses was primarily due to an increase in personnel expenses related to the hiring of senior sales executives and technical pre-sales consulting staff, including expanding the sales staff in the London office. The increase also includes the addition of the staff of Mabel Systems B.V. ("Mabel"), acquired in November 1997, an increase in sales seminars and travel expenses related to the sales process, and an increase in advertising and promotional expenses, including trade shows, brochures and sales incentive expenses. Research and Development. Research and development expenses consist primarily of personnel costs attributable to the development of new software products and the enhancement of existing products. Research and development expenses increased 26% from $2.2 million in the three months ended March 31, 1997 to $2.8 million in the three months ended March 31, 1998. Research and development expenses in the three months ended March 31, 1997 and 1998 represented 30% and 24%, respectively, of total revenues for those periods. The increase in research and development expenses was primarily due to increases in personnel costs for new and existing employees and costs for independent contractors. General and Administrative. General and administrative expenses primarily comprise personnel costs related to management, accounting, human resources and administration and associated overhead costs, as well as fees for professional services. General and administrative expenses increased 36% from $1.1 million in the three months ended March 31, 1997 to $1.4 million in the three months ended March 31, 1998, representing 14% and 12%, respectively, of total revenues for those periods. The increase in general and administrative expenses was primarily attributable to an increase in the bad debt reserve and an increase in legal fees. The increase in the bad debt reserve resulted from the increase in revenues. The increase in the legal fees was primarily related to activity in the securities litigation claim. Write-off of Purchased In-Process Research and Development. In the first quarter of 1998, the Company expensed $5.4 million of purchased in-process research and development associated with the Quantra products acquired in March 1998. Because these products had not yet reached technological feasibility at the time of the Quantra Acquisition and, in the Company's judgment, there was no alternative use for the related research and development, such in-process research and development was charged to expense. Subsequent to the issuance of the Company's March 31, 1998 consolidated condensed financial statements, the Securities and Exchange Commission (the "SEC") issued new guidance on its views regarding the valuation methodology used in determining purchased in-process technology expensed at the date of acquisitions. The Company also had ongoing discussions with the SEC staff concerning the valuation of purchased in-process technology acquired in connection with the Quantra Acquisition. As a result of the SEC guidance and these discussions, the Company has modified its methods used to value the purchased in-process technology and has applied the stage of completion approach to the in-process research and development acquired through the Quantra Acquisition. The effect of this estimate was to increase the allocation of the purchase price to completed technology and decrease the allocation of the purchase price to purchased in-process technology. As a result of these changes, the Company is restating its March 30, 1998, June 30, 1998 and September 30, 1998 consolidated condensed financial statements. The write-off of purchased in-process research and development decreased by $1.9 million in the first quarter of 1998. For the Quantra Acquisition, the Company determined the value of the completed technologies and in-process research and development using a risk-adjusted, discounted cash flow approach. In-process research and development projects identified at the Quantra Acquisition included the following: Quantra Mortgage Loan Management System ("MLMS"). This project involves upgrading the loan management software from 16-bit to 32-bit architecture. MLMS is a complete software solution designed to process and provide information required by managers of mortgage loan portfolios. As of the acquisition date, the Company estimated that this project was 26% complete. The estimated cost to complete the project was approximately $2.8 million. The Company expects to incur approximately $1.8 million in 1998 and an additional $1.0 million in 1999. The anticipated product launch for this project is the second half of 1999, at which time the Company expects to begin to benefit economically from this project. 10 Real Estate Management System ("REMS"). This project involves completing the development and/or upgrading of approximately half of the twenty-one modules of this integrated, modular suite of software. The software is designed to process and provide information for managers of real estate portfolios. The development effort will mostly involve the development and integration of these modules with a central data management module. As of the acquisition date, the Company estimated that the project was 34% complete. The estimated cost to complete the project was $4.9 million with $3.7 million expected to be incurred in 1999 and beyond. The anticipated product launch for certain modules is in late 1998 with additional modules launches expected in 1999 and 2000. SKYLINE for Windows. This project involved the development of the property management software in a Windows platform. The Company expects the product to achieve technological feasibility in the third quarter of 1998. As of the acquisition date, the Company estimated that the project was 77% complete. The estimated cost to complete the project was $0.3 million. For the Quantra Acquisition, the Company developed revenue projections over a five- to six-year period in three categories: license, maintenance and consulting. License revenue projections were based on expected unit sales over the projected lives of the respective product lines. The other categories of revenues were generally estimated as a percentage of total license revenues and ranged from 15% to 20% for maintenance and from 10% to 20% for consulting, depending on the product. The Company has included the consulting revenues in the valuation of the technologies because they consist of installation, data conversion and customer training services directly and specifically related to the corresponding technology. Expense assumptions were based on the imposition of the Company's cost structure on the acquired technologies and products. The discount rates for the Quantra in-process research and development projects were 23% and 28%. The discount rates for these projects were higher than the Company's implied weighted average cost of capital due to the inherent uncertainties surrounding the successful development of the in-process research and development and the related risk of realizing cash flows from products that have not yet reached technological feasibility, among other factors. The Company believes that the assumptions used in the forecasts were reasonable at the date of acquisition. The Company cannot be assured, however, that the underlying assumptions used to estimate expected product sales, development costs or profitability, or the events associated with such projects, will transpire as estimated. Accordingly, actual results may vary from the projected results. All development efforts for Quantra products are proceeding as expected and management believes that technological feasibility can be achieved. If these projects are not successfully completed, the sales and profitability of the Company may be adversely affected in future periods and the value of certain related intangibles may become impaired. Interest Income. The Company recorded net interest income of $449,000 in the three months ended March 31, 1997 as compared to net interest income of $592,000 in the three months ended March 31, 1998. The increase in net interest income was primarily attributable to a decrease in interest expense on loans assumed by the Company in connection with the Shepro Acquisition that the Company paid in full in early 1998 and an increase in the rate of return as the average length of maturity in marketable securities was increased. Provision for Income Taxes. Despite a loss for the three months ended March 31, 1997, the Company recorded a provision for income taxes for $70,000. Losses from Shepro Braun, an S Corporation at that time, offset the pre-tax income from the Company's other operations, but such losses were not deductible for income tax purposes. The Company had an effective tax rate of 41% for the period, excluding the losses incurred by Shepro Braun. The effective tax rate was 34% for the three months ended March 31, 1998. The effective tax rate decrease was primarily due to a larger percentage of tax-exempt interest income earned during the three months ended March 31, 1998 as compared to the three months ended March 31, 1997. LIQUIDITY AND CAPITAL RESOURCES During the three months ended March 31, 1997, the Company financed its operations primarily through cash flows generated from operations of $2.4 million. During the three months ended March 31, 1998, the Company used cash in operating activities of $1.7 million. The decrease in the cash provided by operations was primarily due to payments of accrued expenses, including performance bonuses based on 1997 financial results, and an increase in tax payments, also due to the 1997 financial results. Unbilled accounts receivable increased $1.6 million primarily due to billing terms associated with contracts signed in March 1998 and the contracts related to Quantra sales signed subsequent to the acquisition date. Investing activities provided cash of $4.4 million and used cash of $9.7 million for the three months ended March 31, 1997 and 1998, respectively. Investing activities during the three months ended March 31, 1998 consisted primarily of a change in the Company's investment portfolio whereby the Company increased its positions in investments which matured in more than 90 days and had fewer investments in securities with maturities less than 90 days. The Company also used cash to partially finance the acquisition of Quantra for $2.3 million and transferred an additional $1.2 million of cash to an escrow account in connection with the acquisition. 11 Financing activities provided cash of $161,000 for the three months ended March 31, 1997 and used cash of $90,000 for the three months ended March 31, 1998. Financing activities during the three months ended March 31, 1997 consisted primarily of the repayment of $409,000 of debt, offset by the release of a letter of credit of $505,000. Financing activities during the three months ended March 31, 1998 consisted primarily of the repayment of $765,000 of debt, offset by the proceeds from the exercise of options of $675,000. As of March 31, 1998, the Company had $52.4 million in cash, cash equivalents and marketable securities. The Company believes that its current cash balances and net cash provided by operating activities will be sufficient to meet its working capital and capital expenditure requirements for the next 12 months. YEAR 2000 Year 2000 Compliance. The information presented below related to year 2000 compliance contains forward-looking statements that are subject to risks and uncertainties. The Company's actual results may differ significantly from the results discussed below and elsewhere in this Form 10-Q regarding Year 2000 compliance. Year 2000 Issue Defined. The Year 2000 ("Y2K") issue is the result of certain computer hardware, operating system software and software application programs having been developed using two digits rather than four digits to define a year. For example the clock circuit in the hardware may be incapable of holding a date beyond the year 1999; some operating systems recognize a date using "00" as the year 1900 rather than 2000 and certain applications may have limited date processing capabilities. These problems could result in the failure of major systems or miscalculations, which could have material impact on companies through business interruption or shutdown, financial loss, damage to reputation, and legal liability to third parties. State of Readiness. The Company formed at Y2K Review Team ("Team") in 1998 to address the potential impact of Y2K on the Company. In particular, the Y2K Plan addresses four principal areas that may be impacted by the Y2K issue: SS&C Technologies Products, Information Technology (IT) Systems, Third Party Relationships and non-IT Systems. The initial phase was to organize a team of both IT and non-IT employees and to develop a process. The second phase was to establish an inventory of all potential areas where Y2K problems could exist. The inventory included, server hardware (BIOS), server operating systems, server application software, network device hardware and software, PC hardware (BIOS), PC operating systems, PC application software, phone and security systems the Company's Products and our vendors. Each area listed in the inventory was assigned to a Team member to evaluate the current Y2K compliance and where required, recommend a solution to correct the problem. As of the end of the second quarter of 1999, the Company has substantially completed both phases for both the IT and non-IT systems. The Company is currently involved in the remediation phase and expects to be completed in the fourth quarter of 1999. However, the Company continues to review information developed as a result of its overall effort, which could result in additional items being added to its Y2K inventory. SS&C Technologies Products. The Company has utilized both in-house and outside consultants to test whether its products are Y2K compliant. Most of the Company's key products have already passed rigorous testing to be certified as Y2K compliant. In the event that any Y2K-compliance issues with its supported products arise, it is the Company's intention to rectify those problems through the software support process. Costs associated with the testing and modifications to make the Company's products Y2K compliant have not had, and are not expected to have a material adverse effect on the Company's business, financial condition or results of operations and cash flows. Third Party Relationships. The Company's business operations are heavily dependent on third party materials suppliers. The Company is working with all key external partners to identify and to mitigate the potential risks of Y2K. The failure of external parties to resolve their own Y2K issues, in a timely manner, could result in a material financial risk to the Company. As part of the overall Y2K program, the Company is actively communicating with third parties through correspondence. Because the Company's Y2K compliance is dependant on the timely Y2K compliance of third parties, there can be no assurance that the Company's efforts alone will resolve all Y2K issues. Contingency Plans. There can be no assurance that the systems of other parties upon which the Company's business relies directly or indirectly will be Year 2000 compliant. The costs of becoming Y2K compliant, or the failure thereof by the Company or other parties, could have a material adverse effect on the Company's business, financial condition or results of operations. Given the possibility of system failure as a result of the century change, the Company is currently in the process of formulating one or more contingency plans, which it anticipates implementing during the fourth quarter of 1999. Costs to Address Year 2000 issues. The Y2K costs incurred to date have not been material. Most software applications, BIOS and operating system upgrades to Y2K compliance were incorporated into the Company's standard licensing agreements. As part of the contingency planning effort we will examine additional potential Y2K costs, where applicable. 12 CERTAIN FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS Fluctuations in Quarterly Performance. The Company's revenues and operating results historically have varied substantially from quarter to quarter. The Company's quarterly operating results may continue to fluctuate due to a number of factors, including the timing, size, and nature of the Company's individual license transactions; the timing of the introduction and the market acceptance of new products or product enhancements by the Company or its competitors; the relative proportions of revenues derived from license fees, maintenance, consulting, and other recurring revenues and professional services; changes in the Company's operating expenses; personnel changes; and fluctuations in economic and financial market conditions. The timing, size, and nature of individual license transactions are important factors in the Company's quarterly operating results. Many such license transactions involve large dollar amounts, and the sales cycles for these transactions are often lengthy and unpredictable. There can be no assurance that the Company will be successful in closing large license transactions on a timely basis or at all. Dependence on Financial Services Industry. The Company's clients include a range of organizations in the financial services industry, and the success of such clients is intrinsically linked to the health of the financial markets. In addition, because of the capital expenditures required in connection with an investment in the Company's products, the Company believes that demand for its products could be disproportionately affected by fluctuations, disruptions, instability, or downturns in the financial markets, which may cause clients and potential clients to exit the industry or delay, cancel, or reduce any planned expenditures for investment management systems and software products. Any resulting decline in demand for the Company's products could have a material adverse effect on the Company's business, financial condition, and results of operations. Product Concentration. To date, substantially all of the Company's revenues have been attributable to the licensing of its CAMRA, PTS, FILMS, REMS, MLMS, Telesales, Antares and Total Return software and the provision of maintenance and consulting services in connection therewith. The Company currently expects that the licensing of such software products, as well as certain other products acquired by the Company in connection with recent acquisitions and the provision of related services, will account for a substantial portion of its revenues for the foreseeable future. As a result, factors adversely affecting the pricing of or demand for such products and services, such as competition or technological change, could have a material adverse effect on the Company's business, financial condition, and results of operations. Management of Growth. The Company's business has grown significantly in size and complexity over the past several years. The growth in the size and complexity of the Company's business as well as its client base has placed and is expected to continue to place a significant strain on the Company's management and operations. The Company's ability to compete effectively and to manage future growth, if any, will depend on its ability to continue to implement and improve operational, financial, and management information systems on a timely basis and to expand, train, motivate, and manage its work force. There can be no assurance that the Company's personnel, systems, procedures, and controls will be adequate to support the Company's operations. If the Company's management is unable to manage growth effectively, the quality of the Company's products and its business, financial condition, and results of operations could be materially adversely affected. Integration of Operations. The Company's success is dependent in part on its ability to complete its integration of the operations of its recent acquisitions, including HedgeWare, in an efficient and effective manner. The successful integration in a rapidly changing financial services industry may be more difficult to accomplish than in other industries. The combination of these acquired companies will require, among other things, integration of the acquired companies' respective product offerings and coordination of their sales and marketing and research and development efforts. There can be no assurance that such integration will be accomplished smoothly or successfully. The difficulties of such integration may be increased by the necessity of coordinating geographically separated organizations. The integration of certain operations will require the dedication of management resources that may temporarily distract attention from the day-to-day business of the combined Company. The inability of management to successfully integrate the operations of acquired companies could have a material adverse effect on the business, financial condition, and results of operations of the Company. Competition. The market for financial service software is competitive, rapidly evolving, and highly sensitive to new product introductions and marketing efforts by industry participants. Although the Company believes that none of its competitors currently competes against the Company in all of the markets served by the Company, there can be no assurance that such competitors will not compete against the Company in the future in additional markets. In addition, many of the Company's current and potential future competitors have significantly greater financial, technical and marketing resources, generate higher revenues, and have greater name recognition than does the Company. Rapid Technological Change. The market for the Company's products and services is characterized by rapidly changing technology, evolving industry standards, and new product introductions. The Company's future success will depend in part upon its ability to enhance its existing products and services and to develop and introduce new products and services to meet changing client requirements. The process of developing software products such as those offered by the Company is extremely complex and is expected to become increasingly complex and expensive in the future with the introduction of new platforms and technologies. There can be no assurance 13 that the Company will successfully complete the development of new products in a timely fashion or that the Company's current or future products will satisfy the needs of the financial markets. Dependence on Database Supplier. The relational database design in many of the Company's software products incorporates PFXplus, a "C"-based database management system licensed to the Company by POWERflex Corporation Proprietary Limited, an Australian vendor ("Powerflex"). If Powerflex were to increase its fees under the license agreement, the Company's results of operations could be materially adversely affected. Moreover, if Powerflex were to terminate the license agreement, the Company would have to seek an alternative relational database for its software products. While the Company believes that it could migrate its products to an alternative database, there can be no assurance that the Company would be able to license in a timely fashion a database with similar features and on terms acceptable to the Company. Dependence on Proprietary Technology. The Company's success and ability to compete is dependent in part upon its proprietary technology. The Company relies on a combination of trade secret, copyright, and trademark law, nondisclosure agreements and technical measures to protect its proprietary technology. There can be no assurance that the steps taken by the Company to limit access to its proprietary technology will be adequate to deter misappropriation or independent third-party development of such technology. Product Defects and Product Liability. The Company's software products are highly complex and sophisticated and could, from time to time, contain design defects or software errors that could be difficult to detect and correct. Errors, bugs, or viruses may result in loss of or delay in market acceptance or loss of client data. Although the Company has not experienced material adverse effects resulting from any software defects or errors, there can be no assurance that, despite testing by the Company and its clients, errors will not be found in new products, which errors could result in a delay in or inability to achieve market acceptance and thus could have a material adverse impact upon the Company's business, financial condition, and results of operations. Key Personnel. The Company's success is dependent in part upon its ability to attract, train, and retain highly skilled technical, managerial, and sales personnel. The loss of services of one or more of the Company's key employees could have a material adverse effect on the Company's business, financial condition and results of operations. The Company continues to hire a significant number of additional sales, service, and technical personnel. Competition for the hiring of such personnel in the software industry is intense. Locating candidates with the appropriate qualifications, particularly in the desired geographic location, can be difficult. Although the Company expects to continue to attract and retain sufficient numbers of highly skilled employees for the foreseeable future, there can be no assurance that the Company will do so. Risks Associated with International Operations. The Company intends to continue to expand its international sales activity as part of its business strategy. To accomplish such continued expansion, the Company must establish additional foreign operations and hire additional personnel requiring significant management attention and financial resources that could materially adversely affect the Company's business, financial condition, or results of operations. An increase in the value of the U.S. dollar relative to foreign currencies could make the Company's products more expensive and, therefore, potentially less competitive in those foreign markets. A portion of the Company's international sales is denominated in foreign currency. The Company occasionally hedges some of this risk; however, significant fluctuations in the value of foreign currencies could have an adverse effect on the earnings of the Company. In addition, the Company's international business may be subject to a variety of risks, including difficulties in obtaining U.S. export licenses, potentially longer payment cycles, increased costs associated with maintaining international marketing efforts, the introduction of non-tariff barriers and higher duty rates, and difficulties in enforcement of contractual obligations and intellectual property rights. There can be no assurance that such factors will not have a material adverse effect on the Company's business, financial condition, or results of operations. Because of these and other factors, past financial performance should not be considered an indication of future performance. The Company's quarterly operating results may vary significantly, depending on factors such as the timing, size, and nature of licensing transactions and new product introductions by the Company or its competitors. Investors should not use historical trends to anticipate future results and should be aware that the trading price of the Company's common stock may be subject to wide fluctuations in response to quarterly variations in operating results and other factors, including those discussed above. ACCOUNTING PRONOUNCEMENTS In June 1997, Statement of Financial Accounting Standards No. 131, Reporting Comprehensive Income ("SFAS No. 131") was issued. SFAS No. 131 requires public companies to report all financial and descriptive information about operating segments in their financial statements and requires selected information about operating segments to be reported in interim financial reports issued to shareholders. Operating segment financial information is required to be reported on the basis that is used internally for evaluating segment performance and allocation of resources. SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997 and requires presentation of comparative information for prior periods presented. SFAS No. 131 does not need to be applied to interim financial statements in 1998. The adoption of SFAS No. 131 is expected to impact the way the Company reports information about its operating segments. 14 The Company adopted Statement of Position No. 97-2, Software Revenue Recognition ("SOP 97-2"), which is effective in fiscal years beginning after December 15, 1997. Retroactive application of the provisions of SOP 97-2 from the previously issued SOP on software revenue recognition is prohibited. The adoption of SOP 97-2 did not have a material impact on the Company's business, financial condition, and results of operations. 15 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K a. The exhibits listed in the Exhibit Index immediately preceding such exhibits are filed as part of or are included in this report. b. On January 8, 1998, the Company filed a Current Report on Form 8-K, dated December 31, 1997, to report under Item 2 (Acquisition or Disposition of Assets) the Company's acquisition of Shepro Braun Systems, Inc. No financial statements were required to be filed with such report. On January 28, 1998, the Company filed Amendment No. 1 to Current Report on Form 8-K/A, dated November 14, 1997, for the purpose of filing the financial statements of Mabel Systems B.V. ("Mabel") required by Item 7(a) and the pro forma financial information required by Item 7(b) with respect to the Company's acquisition of Mabel on November 14, 1997. 16 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SS&C TECHNOLOGIES, INC. Date: August 17, 1999 By: /s/ Anthony R. Guarascio Anthony R. Guarascio Senior Vice President And Chief Financial Officer (Principal Financial and Accounting Officer) 17 EXHIBIT INDEX Exhibit Number Description -------------- ----------- 2 Asset Purchase Agreement, dated as of March 20, 1998, by and among SS&C Technologies, Inc., AEGON USA Realty Advisors, Inc. and Quantra Corporation is incorporated herein by reference to Exhibit 2 to the Registrant's Current Report on Form 8-K, dated March 20, 1998 (File No. 000-28430) 10.1 1998 Stock Incentive Plan is incorporated herein by reference to Annex A to the Registrant's Definitive Schedule 14A filed April 6, 1998. (File No. 000-28430) 10.2 Amendment No. 2 to 1996 Employee Stock Purchase Plan, as amended * 27 Restated Financial Data Schedule * Previously Filed 18 EX-27 2 RESTATED FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENTS INCLUDED IN THIS QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 12,102 40,330 21,250 2,444 0 74,409 9,020 4,092 94,080 19,294 0 0 0 159 74,377 94,080 11,590 11,590 0 2,829 13,490 168 0 (4,137) (1,481) (2,656) 0 0 0 (2,656) (.19) (.19)
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