<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 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 1-12989
SUNGARD/(R)/ DATA SYSTEMS INC.
-------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 51-0267091
---------------------------------- -----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1285 DRUMMERS LANE, WAYNE, PENNSYLVANIA 19087
---------------------------------------------
(Address of principal executive offices, including zip code)
(610) 341-8700
---------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No___
---
There were 105,368,658 shares of the registrant's common stock, par value $.01
per share, outstanding at September 30, 1998.
<PAGE>
SUNGARD DATA SYSTEMS INC.
AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 1998
(unaudited) and December 31, 1997.............................. 1
Consolidated Statements of Income for the nine and three months
ended September 30, 1998 and 1997 (unaudited).................. 2
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1998 and 1997 (unaudited).................. 3
Notes to Consolidated Financial Statements (unaudited)......... 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 8
Part II. Other Information
Item 1. Legal Proceedings.............................................. 16
Item 2. Changes in Securities.......................................... 16
Item 3. Defaults upon Senior Securities................................ 16
Item 4. Submission of Matters to a Vote of Security Holders............ 16
Item 5. Other Information.............................................. 16
Item 6. Exhibits and Reports on Form 8-K............................... 16
Signatures ............................................................... 17
</TABLE>
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
SUNGARD DATA SYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Sept. 30,
1998 December 31,
(Unaudited) 1997 (1)
---------- -------------
<S> <C> <C>
ASSETS
Current:
Cash and equivalents..................................................................... $ 174,809 $ 81,185
Short-term investments, at cost, which approximates market............................... 18,622 24,970
Trade receivables, less allowance for doubtful accounts of $34,119 and $19,702........... 224,480 183,757
Earned but unbilled receivables.......................................................... 44,906 40,951
Prepaid expenses and other current assets................................................ 27,217 24,269
Deferred income taxes.................................................................... 25,291 21,163
------------ -------------
Total current assets................................................................ 515,325 376,295
Property and equipment, less accumulated depreciation of $245,660 and $202,336............. 131,540 123,261
Software products, less accumulated amortization of $104,126 and $89,022................... 68,759 75,634
Goodwill, less accumulated amortization of $37,301 and $32,660............................. 164,318 160,109
Other intangible assets, less accumulated amortization of $56,924 and $45,451.............. 127,422 121,649
------------- -------------
$ 1,007,364 $ 856,948
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current:
Short-term and current portion of long-term debt....................................... $ 11,123 $ 16,996
Accounts payable....................................................................... 14,889 19,105
Accrued compensation and benefits...................................................... 66,744 58,592
Other accrued expenses................................................................. 43,583 30,552
Accrued income taxes................................................................... 10,226 6,736
Deferred revenues...................................................................... 137,754 111,666
------------ -------------
Total current liabilities.......................................................... 284,319 243,647
------------ -------------
Long-term debt............................................................................ 3,002 3,080
------------ -------------
Commitments...............................................................................
Stockholders' equity:
Preferred stock, par value $.01 per share; 5,000 shares authorized..................... -- --
Common stock, par value $.01 per share; 320,000 shares authorized;
105,369 and 102,085 shares issued................................................... 1,054 1,021
Capital in excess of par value......................................................... 267,256 228,333
Notes receivable for common stock...................................................... -- (500)
Restricted stock plans................................................................. (1,796) (1,532)
Retained earnings...................................................................... 459,094 389,545
Accumulated other comprehensive loss................................................... (5,565) (6,646)
------------ -------------
Total stockholders' equity........................................................... 720,043 610,221
------------ -------------
$ 1,007,364 $ 856,948
============ =============
</TABLE>
(1) RESTATED FOR POOLING-OF-INTERESTS WITH INFINITY FINANCIAL TECHNOLOGY, INC.
See accompanying notes
1
<PAGE>
SUNGARD DATA SYSTEMS INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
----------------------- --------------------------
1998 1997 (1) 1998 1997 (1)
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues............................................................. $ 838,882 $ 655,766 $ 291,982 $ 231,640
---------- ---------- ----------- -----------
Costs and expenses:
Cost of sales and direct operating................................. 349,506 272,555 119,505 95,623
Sales, marketing and administration................................ 181,986 138,154 62,906 49,282
Product development................................................ 79,147 62,269 26,913 20,138
Depreciation of property and equipment............................. 41,508 36,547 14,352 12,871
Amortization of intangible assets.................................. 37,028 33,809 12,883 11,209
Merger and restructuring costs..................................... 11,847 10,817 3,100 338
---------- ---------- ---------- -----------
701,022 554,151 239,659 189,461
----------- ---------- ---------- -----------
Income from operations............................................... 137,860 101,615 52,323 42,179
Interest income.................................................... 4,575 2,437 1,724 755
Interest expense................................................... (1,058) (2,015) (324) (694)
----------- ---------- ---------- -----------
Income before income taxes........................................... 141,377 102,037 53,723 42,240
Income taxes....................................................... 60,672 41,684 22,536 17,286
----------- ---------- ---------- -----------
Net income........................................................... $ 80,705 $ 60,353 $ 31,187 $ 24,954
=========== ========== ========== ===========
Basic net income per common share................................... $ 0.78 $ 0.61 $ 0.30 $ 0.25
=========== ========== ========== ===========
Shares used to compute basic net income per common share............ 103,712 98,840 104,957 99,499
=========== ========== ========== ===========
Diluted net income per common share................................. $ 0.75 $ 0.59 $ 0.29 $ 0.24
=========== ========== ========== ===========
Shares used to compute diluted net income per common share.......... 107,748 102,883 108,869 103,106
=========== ========== ========== ===========
</TABLE>
(1) RESTATED FOR POOLING-OF-INTERESTS WITH INFINITY FINANCIAL TECHNOLOGY, INC.
See accompanying notes
2
<PAGE>
SUNGARD DATA SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------------
1998 1997 (1)
------------------- -------------
<S> <C> <C>
CASH FLOW FROM OPERATIONS:
Net income............................................................................ $ 80,705 $ 60,353
Reconciliation of net income to cash flow from operations:
Depreciation and amortization...................................................... 78,536 70,311
Purchased in-process research and development...................................... - 10,161
Other noncash charges.............................................................. 8,130 3,648
Deferred income tax benefit........................................................ (8,111) (11,991)
Accounts receivable and other current assets....................................... (48,067) (26,458)
Accounts payable and accrued expenses.............................................. 15,282 (2,689)
Deferred revenues.................................................................. 17,788 1,990
------------------- ------------
Cash flow from operations........................................................ 144,263 105,325
------------------- ------------
FINANCING ACTIVITIES:
Cash received under employee stock plans.............................................. 22,018 9,547
Cash received under revolving line of credit and other borrowings..................... 143 168,098
Repayments of debt.................................................................... (8,729) (186,796)
------------------- ------------
Total financing activities....................................................... 13,432 (9,151)
------------------- ------------
INVESTMENT ACTIVITIES:
Cash paid for acquired businesses, net of cash acquired............................... (13,996) (59,082)
Cash paid for property and equipment.................................................. (48,918) (39,437)
Cash paid for software and other long-term assets..................................... (7,508) (6,758)
Cash paid for purchase of short-term investments...................................... (12,444) (57,904)
Cash received from maturities of short-term investments............................... 18,795 35,035
------------------- ------------
Total investment activities...................................................... (64,071) (128,146)
------------------- ------------
Increase (decrease) in cash and equivalents............................................. 93,624 (31,972)
Beginning cash and equivalents.......................................................... 81,185 83,024
------------------- ------------
Ending cash and equivalents............................................................. $ 174,809 $ 51,052
=================== ============
SUPPLEMENTAL INFORMATION:
Acquired businesses:
Property and equipment............................................................. 1,061 5,643
Software products.................................................................. 675 16,876
Purchased in-process research and development...................................... - 10,161
Deferred income taxes.............................................................. 318 1,761
Goodwill and other intangible assets............................................... 19,552 30,474
Purchase price obligations and debt assumed........................................ (2,600) (3,135)
Net current liabilities assumed.................................................... (12,017) (103)
Common stock issued and net equity acquired in poolings-of-interests .............. 7,007 (2,595)
------------------- ------------
Cash paid for acquired businesses, net of cash acquired................................. $ 13,996 $ 59,082
=================== ============
</TABLE>
(1)RESTATED FOR POOLING-OF-INTERESTS WITH INFINITY FINANCIAL TECHNOLOGY, INC.
See accompanying notes
3
<PAGE>
SUNGARD DATA SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION:
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries, and have been prepared in accordance with
generally accepted accounting principles for interim financial reporting and
with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
All significant intercompany transactions and accounts have been eliminated. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included in the
accompanying financial statements. Operating results for the nine and three
month periods ended September 30, 1998 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1998. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's annual report on Form 10-K for the year ended
December 31, 1997.
2. MERGER AND RESTRUCTURING COSTS:
During the nine and three months ended September 30, 1998, the Company
recorded merger and restructuring costs of $11,847,000 and $3,100,000,
respectively ($10,158,000 after-tax, or $0.09 per diluted share, and $2,510,000
after-tax, or $0.02 per diluted share, respectively). Merger costs, which are
generally nondeductible for income tax purposes, are comprised of $4,131,000 for
costs associated with the merger with Infinity Financial Technology, Inc.
(Infinity), $3,100,000 associated with the merger with Multinational Computer
Models, Inc. (MCM), $1,316,000 for costs associated with the Company's expired
offer to acquire Rolfe & Nolan Plc., and $600,000 for costs associated with the
merger with Plaid Brothers Software, Inc. (Plaid Brothers). Merger costs consist
of investment banking, legal, accounting and printing fees.
Also, the Company recorded $2,700,000 during the first quarter of 1998 for
restructuring costs associated with the merger with Infinity. Approximately
$1,500,000 of these costs are in connection with severance of approximately
forty employees associated with elimination of duplicate software development
and administrative functions, and approximately $1,200,000 of these costs are
primarily associated with closure of duplicate office facilities. Twenty
employees have been terminated through September 30, 1998. The balance of the
restructuring reserve at September 30, 1998 is $1,614,000. The Company expects
to complete the restructuring plan and utilize the balance of the reserve by
December 31, 1998.
During the nine and three months ended September 30, 1997, the Company
recorded charges to operations of $10,817,000 and $338,000, respectively
($6,694,000 after-tax, or $0.06 per diluted share, and $338,000 after-tax, or
less than $0.01 per diluted share, respectively), principally in connection with
purchased in-process research and development associated with the acquisition of
certain assets of Premier Solutions Ltd. and another small acquisition.
4
<PAGE>
SUNGARD DATA SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
3. ACQUISITIONS:
On January 2, 1998, the Company issued 13,223,000 shares of common stock in
connection with a merger with Infinity. Infinity develops, markets and supports
enterprise software solutions for financial trading and risk management. The
merger has been accounted for as a pooling-of-interests. Therefore, in
accordance with generally accepted accounting principles, all historical
financial information of the Company has been restated to include the historical
financial information of Infinity. A reconciliation of 1997 revenues, net
income and net income per common share from those amounts originally reported to
the amounts presented in the accompanying consolidated statements of income
follows:
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
------------------ ------------------
<S> <C> <C>
REVENUES:
As originally reported $609,557 $214,485
Infinity 46,209 17,155
-------- --------
Combined $655,766 $231,640
======== ========
NET INCOME:
As originally reported $ 54,978 $ 22,769
Infinity 5,375 2,185
-------- --------
Combined $ 60,353 $ 24,954
======== ========
BASIC NET INCOME PER COMMON SHARE:
As originally reported $ 0.64 $ 0.26
======== ========
Combined $ 0.61 $ 0.25
======== ========
DILUTED NET INCOME PER COMMON SHARE:
As originally reported $ 0.62 $ 0.26
======== ========
Combined $ 0.59 $ 0.24
======== ========
</TABLE>
Also during the first nine months of 1998, the Company completed mergers
with Plaid Brothers and MCM, acquired substantially all of the assets of ICMS
International, Inc. (ICMS), and acquired certain assets of a disaster recovery
professional services business. The mergers with Plaid Brothers and MCM have
been accounted for as poolings-of-interests. The accompanying consolidated
financial statements include the results of Plaid Brothers from April 1, 1998,
and the results of MCM from July 1, 1998; prior periods have not been restated
since the impact of such restatement would not be material. The accompanying
consolidated financial statements also include the results of ICMS and the
acquired disaster recovery professional services business from the respective
dates of acquisition. The Company does not expect that these four acquisitions
will have a material effect on its financial condition or results of operations.
5
<PAGE>
SUNGARD DATA SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
4. NET INCOME PER COMMON SHARE:
CALCULATION OF BASIC AND DILUTED NET INCOME PER COMMON SHARE:
The following table sets forth the computation of the number of shares used
in the computation of basic and diluted net income per common share for the nine
and three months ended September 30, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Income $ 80,705 $ 60,353 $ 31,187 $ 24,954
======== ======== ======== ========
Weighted-average common shares outstanding 103,683 98,812 104,957 99,499
Contingent shares 29 28 -- --
-------- -------- -------- --------
Total shares used for calculation of basic net income per
common share 103,712 98,840 104,957 99,499
Employee stock options 3,907 3,987 3,647 3,552
Contingent stock options 129 56 265 55
-------- -------- -------- --------
Total shares used for calculation of diluted net income per
common shares 107,748 102,883 108,869 103,106
======== ======== ======== ========
</TABLE>
COMMON STOCK SPLIT:
On August 14, 1997, the Company's Board of Directors authorized a two-for-
one split of the Company's common stock. The stock split was effective for
stockholders of record on September 2, 1997, and shares were issued on September
22, 1997. The number of shares used for purposes of calculating net income per
common share and all per share data have been adjusted for all periods presented
to reflect the stock split.
6
<PAGE>
SUNGARD DATA SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
5. COMPREHENSIVE INCOME:
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income." The
statement, which became effective January 1, 1998, establishes rules for the
reporting of comprehensive income and its components in financial statements.
Comprehensive income consists of net income, adjusted for other increases and
decreases affecting stockholders' equity that, under generally accepted
accounting principles, are excluded from the determination of net income.
The calculation of comprehensive income for the nine and three months ended
September 30, 1998 and 1997 follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Income $80,705 $60,353 $31,187 $24,954
Foreign currency translation gains (losses) 1,081 (5,116) 910 (918)
Estimated income tax benefit (expense) (440) 2,092 (370) 375
------- ------- ------- -------
Comprehensive income $81,346 $57,329 $31,727 $24,411
======= ======= ======= =======
</TABLE>
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Statements about the Company's expectations and all other statements in
this quarterly report on Form 10-Q other than historical facts are forward-
looking statements. Since these statements involve risks and uncertainties and
are subject to change at any time, the Company's actual results could differ
materially from expected results. The Company derives most of its forward-
looking statements from its operating budgets and forecasts, which are based
upon many detailed assumptions. While the Company believes that its assumptions
are reasonable, it cautions that there are inherent difficulties in predicting
certain important factors, especially the timing and magnitude of software
sales, the timing and scope of technological advances and year 2000 compliance,
the integration and performance of recently acquired businesses, the prospects
for future acquisitions, and the overall condition of the financial services
industry. These factors, as and when applicable, are discussed in the Company's
filings with the Securities and Exchange Commission, including its most recent
Form 10-K, a copy of which may be obtained from the Company without charge.
During the nine and three months ended September 30, 1998, the Company
recorded merger and restructuring costs of $11,847,000 and $3,100,000
($10,158,000 after-tax, or $0.09 per diluted share, and $2,510,000 after-tax, or
$0.02 per diluted share, respectively). Merger costs, which are generally
nondeductible for income tax purposes, are comprised of $4,131,000 for costs
associated with the merger with Infinity, $3,100,000 for costs associated with
the merger with MCM, $1,316,000 for costs associated with the Company's expired
offer to acquire Rolfe & Nolan Plc., and $600,000 for costs associated with the
merger of Plaid Brothers. Merger costs consist principally of investment
banking, legal, accounting and printing fees. Also, the Company recorded
$2,700,000 during the first quarter of 1998 for restructuring costs associated
with the merger with Infinity. These costs are in connection with severance
associated with elimination of duplicate development and administrative
functions, and costs for closure of duplicate office facilities.
During the nine and three months ended September 30, 1997, the Company
recorded charges to operations of $10,817,000 and $338,000 ($6,694,000 after-
tax, or $0.06 per diluted share, and $338,000 after-tax, or less than $0.01 per
diluted share, respectively), principally in connection with purchased in-
process research and development associated with the acquisition of certain
assets of Premier Solutions Ltd. and another small acquisition.
8
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Continued)
The following supplemental income statement information and the following
discussion of income from operations excludes all of the charges to operations
described in the two preceding paragraphs. The following supplemental income
statement information should be read along with the consolidated financial
statements and notes thereto included in this report.
SUNGARD DATA SYSTEMS INC.
SUPPLEMENTAL INCOME STATEMENT INFORMATION
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
<S> <C> <C> <C> <C>
Revenues: 1998 1997 (1) 1998 1997 (1)
-------- -------- -------- --------
Investment support systems $578,885 $439,364 $202,267 $154,631
Disaster recovery services 200,111 167,064 70,352 58,334
Computer services and other 59,886 49,338 19,363 18,675
-------- -------- -------- --------
$838,882 $655,766 $291,982 $231,640
======== ======== ======== ========
Income from operations:
Investment support systems $109,546 $ 76,915 $ 37,709 $ 27,593
Disaster recovery services 41,497 34,307 18,256 13,505
Computer services and other 8,703 7,837 3,314 3,540
Corporate administration (10,039) (6,627) (3,856) (2,121)
Merger and restructuring costs (11,847) (10,817) (3,100) (338)
-------- -------- -------- --------
$137,860 $101,615 $ 52,323 $ 42,179
======== ======== ======== ========
Operating margin:
Investment support systems 18.9% 17.5% 18.6% 17.8%
======== ======== ======== ========
Disaster recovery services 20.7% 20.5% 25.9% 23.2%
======== ======== ======== ========
Computer services and other 14.5% 15.9% 17.1% 19.0%
======== ======== ======== ========
Total 16.4% 15.5% 17.9% 18.2%
======== ======== ======== ========
Total, excluding merger and restructuring
costs 17.8% 17.1% 19.0% 18.4%
======== ======== ======== ========
</TABLE>
(1) RESTATED FOR POOLING-OF-INTERESTS WITH INFINITY FINANCIAL TECHNOLOGY,
INC.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Continued)
INCOME FROM OPERATIONS:
Investment Support Systems (ISS):
The Company's ISS business is comprised of more than forty operating units
of various size and complexity. Historically, most operating units have met or
exceeded expectations, while some have not, yielding overall results for the
entire business at approximately the levels expected. Since overall ISS results
reflect the sum of the diverse results of individual operating units, there
could be an adverse impact on ISS revenues and margins if too many individual
units are unable to meet expectations.
The ISS operating margin was 18.9% and 18.6% for the nine and three month
periods ended September 30, 1998, respectively, as compared with 17.5% and 17.8%
for the comparable periods in 1997. The increase in the operating margins are
due primarily to an increase in software license revenues and sales of third-
party hardware and software.
The Company expects that the full-year 1998 ISS operating margin will be
higher than the full-year 1997 ISS operating margin. The most important factors
affecting the ISS operating margin continue to be the timing and magnitude of
software license revenues, the operating margin of recently acquired businesses
and the level of product development spending.
Disaster Recovery Services (DRS):
The DRS operating margin was 20.7% and 25.9% during the nine and three
month periods ended September 30, 1998, respectively, as compared with 20.5% and
23.2% for the comparable periods in 1997. The increase in the operating margins
are due primarily to an increase in revenues, especially in connection with mid-
range, work-group recovery and network services, offset partially by expenses
resulting from a 28% expansion (which added 64,000 square feet) of the
Philadelphia MegaCenter, equipment additions and upgrades and an increase in
commission expenses resulting from new contract signings. The increase in the
operating margin during the three month period is also favorably impacted by the
collection of certain accounts receivable which had previously been reserved.
The Company expects that the 1998 full-year DRS operating margin will
approximate the 1997 full-year DRS operating margin. The most important factors
affecting the DRS operating margin continue to be the rate of new contract
signings and contract renewals, the timing and magnitude of equipment and
facilities expenditures, and the performance of recently acquired businesses.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Continued)
INCOME FROM OPERATIONS, CONTINUED:
Computer Services and Other (CS):
The CS operating margin was 14.5% and 17.1% during the nine and three month
periods ended September 30, 1998, respectively, as compared with 15.9% and 19.0%
for the comparable periods in 1997. The decrease in the operating margins is
due to an increase in operating costs associated with equipment upgrades in the
Company's remote-access computer processing business, which offset an increase
in revenues in the Company's healthcare information systems (HIS) business.
The Company expects that the 1998 full-year CS operating margin will be
lower than the 1997 full-year CS operating margin. The most important factors
affecting the CS operating margin continue to be the timing and magnitude of
software license revenues of the HIS business, and revenue variability and
timing of computer upgrades in both remote-access computer processing and
automated mailing services businesses.
REVENUES:
Total revenues for the nine and three month periods ended September 30,
1998 increased $183.1 million, or 28%, and $60.3 million, or 26%, respectively,
as compared with the corresponding periods in 1997. Excluding acquired
businesses, revenues increased approximately 18% during the nine and three month
periods compared with the corresponding periods in 1997.
Recurring revenues derived from computer processing, disaster recovery
fees, professional services, software maintenance, and software and hardware
rentals were $680.8 million, or 81% of total revenues, and $239.7 million, or
82% of total revenues, during the nine and three month periods ended September
30, 1998, respectively, as compared with $538.4 million, or 82% of total
revenues, and $186.9 million, or 81%, of total revenues, during the comparable
periods in 1997.
Professional services revenues totaled $132.7 million and $50.4 million
during the nine and three month periods ended September 30, 1998, respectively,
as compared with $74.3 million and $25.5 million during the comparable periods
in 1997. The increase in professional services revenues is due primarily to
large installation and conversions of trust, shareholder and not-for-profit
accounting systems.
Non-recurring revenues, derived from software licenses and sales of third-
party software and hardware, were $158.1 million and $52.3 million during the
nine and three month periods ended September 30, 1998, respectively, as compared
with $117.4 million and $44.7 million during the comparable periods in 1997.
Software license revenues totaled $128.7 million and $41.6 million
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Continued)
REVENUES, CONTINUED:
during the nine and three month periods ended September 30, 1998, respectively,
as compared with $101.8 million and $38.8 million during the comparable periods
in 1997. The increase in software license revenues was due primarily to
investment support systems businesses acquired in 1997, and an increase in
revenues from the Company's global risk management software products.
The Company sells a significant portion of its products and services to the
financial services industry and could be directly affected by the overall
condition of that industry. The Company expects that the consolidation trend in
the financial services industry will continue, but it is unable to predict what
effect, if any, this trend may have on the Company.
Investment Support Systems:
ISS revenues for the nine and three month periods ended September 30, 1998
increased $139.5 million, or 32%, and $47.6 million, or 31%, as compared with
the corresponding periods in 1997. The increases in ISS revenues during the
nine and three month periods are attributable to increases in recurring revenues
of $104.8 million and $39.8 million, respectively, and increases in non-
recurring revenues of $34.7 million and $7.8 million, respectively. Excluding
acquired businesses, revenues increased approximately 18% during the nine and
three month periods ended September 30, 1998, compared with the corresponding
periods in 1997.
Disaster Recovery Services:
DRS revenues for the nine and three month periods ended September 30, 1998
increased $33.0 million, or 20%, and $12.0 million, or 21%, as compared with the
corresponding periods in 1997. The increases are attributable primarily to
increases in revenues resulting from new contract signings and contract
renewals, growth in mid-range, work-group recovery and network services.
Excluding acquired businesses, revenues increased approximately 19% during the
nine month period ended September 30, 1998, and approximately 20% during the
three month period, compared with the corresponding periods in 1997.
Computer Services and Other:
CS revenues for the nine and three month periods ended September 30, 1998
increased $10.5 million, or 21%, and $0.7 million, or 4%, as compared with the
corresponding periods in 1997. The increases are due primarily to an increase
in revenues in the Company's HIS businesses. Excluding acquired businesses,
revenues increased approximately 18% during the nine month period ended
September 30, 1998, and 4% during the three month period ended September 30,
1998, compared with the corresponding periods in 1997.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Continued)
COSTS AND EXPENSES:
Cost of sales and direct operating expenses for the nine and three month
periods ended September 30, 1998 increased $77.0 million, or 28%, and $23.9
million, or 25%, as compared with the corresponding periods in 1997. The
increases are due primarily to acquired businesses, DRS facility expansion and
equipment upgrades.
Sales, marketing and administration expenses for the nine and three month
periods ended September 30, 1998 increased $43.8 million, or 32%, and $13.6
million, or 28%, as compared with the corresponding periods in 1997. The
increases are due primarily to acquired businesses, an expansion in the sales
force, particularly in DRS, and an increase in non-cash expenses associated
with the Company's long-term incentive plan.
Product development expenses for the nine and three month periods ended
September 30, 1998 increased $16.9 million, or 27%, and $6.8 million, or 34%, as
compared with the corresponding periods in 1997. The increases are due
primarily to acquired businesses and an increase in development spending in
connection with various ISS products. Development costs capitalized during the
nine and three month periods ended September 30, 1998 were $2.0 million and $0.7
million, compared with $2.1 million and $0.3 million during the corresponding
periods in 1997.
Depreciation of property and equipment for the nine and three month periods
ended September 30, 1998 increased $4.9 million, or 14%, and $1.5 million, or
11%, compared with the corresponding periods in 1997. The increases are due
primarily to purchases of computer and telecommunications equipment and acquired
businesses.
Amortization of intangible assets for the nine and three month periods
ended September 30, 1998 increased $3.2 million, or 10%, and $1.7 million, or
15%, respectively. The increases are due primarily to acquired businesses and
an acceleration of intangible amortization related to certain international
investment support systems businesses which provide investment accounting
software and processing services.
Interest income for the nine and three month periods ended September 30,
1998 increased $2.1 million, or 88%, and $1.0 million, or 128%, compared with
the corresponding periods in 1997. The increases are due to higher cash and
short-term investment balances. Interest expense decreased $1.0 million, or 47%,
and $0.4 million, or 53%, due to a decrease in short-term debt balances.
The Company's effective income tax rate for the nine and three month
periods ended September 30, 1998 was 42.9% and 41.9%, respectively. Excluding
the effect of merger costs, which are generally nondeductible, the Company's
effective income tax rate was 40.7% for the nine and three month periods ended
September 30, 1998, as compared with an effective income tax rate of 40.6%
during the nine and three month periods ended September 30, 1997, and a full-
year 1997 effective income tax rate, excluding merger costs, of 40.6%.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Continued)
LIQUIDITY AND CAPITAL RESOURCES:
At September 30, 1998, cash and short-term investments increased $87.2
million to $193.4 million from $106.2 million at December 31, 1997. The increase
in cash and short-term investments is net of a decrease in short and long-term
debt from $20.1 million at December 31, 1997 to $14.1 million at September 30,
1998.
The Company expects that its existing cash resources and cash generated
from operations will be sufficient to meet its operating requirements,
contingent payments in connection with previously acquired businesses, and
ordinary capital spending needs for at least the next twelve months.
Furthermore, the Company has a $150.0 million credit agreement, and believes it
has the capacity to secure additional credit or issue equity to finance
additional capital needs.
YEAR 2000 ISSUES:
The Company has a comprehensive year 2000 compliance program to evaluate
and address the impact of year 2000 issues on its software products, processing
services and disaster recovery operations. As part of this program, each of the
Company's operating units is required to identify each item that must be
modified or replaced, establish a plan to complete and test all required
modifications and replacements, and then implement that plan. This program
encompasses the Company's products that are sold to its customers, as well as
third-party products that are resold to customers or are used internally by the
Company. The Company is closely monitoring the progress of each of its operating
units with their year 2000 compliance plans. The Company believes that it will
successfully complete its year 2000 compliance program on a timely basis,
without significant disruption to its customers or operations.
Although many of the Company's software and other products are already year
2000 compliant (meaning that they can handle dates in the year 2000 and beyond),
the Company is still working on year 2000 compliance projects for some of its
important products. The Company estimates that modification and testing for
approximately 90% of its software products will be substantially completed by
the end of 1998. The Company's goal is to complete modification and testing for
all of its software products by June 30, 1999. Nevertheless, the Company
anticipates that year 2000 compliance testing will continue throughout 1999 for
many of its products, which may uncover the need for additional modifications.
In addition to its internal testing, the Company is participating in certain
industry-wide year 2000 compliance tests such as those being conducted by the
Securities Industry Association.
The Company intends to carefully monitor its year 2000 compliance projects
throughout 1999 and will continue to develop and refine contingency plans for
these projects as testing results are analyzed. If the Company fails to make any
of its significant products year 2000 compliant, or fails to meet its
commitments to customers to complete major conversions to year 2000 compliant
systems during 1999, then its business and financial results may be materially
and adversely affected. The Company believes that year 2000 compliance issues
have caused some acceleration of software buying and conversion activity, and,
therefore, that the Company's rate of internal growth may slow down after year
2000.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Continued)
YEAR 2000 ISSUES, CONTINUED:
Many third-party hardware, software and other products interact with the
Company's products and services, or are used by the Company as an integral part
of its operations. The Company continues to evaluate these third-party products
for year 2000 compliance, so that non-compliant products may be modified or
replaced in a timely manner. In doing so, the Company is working with, and must
rely upon, its outside vendors to meet year 2000 requirements. If any of the
Company's important vendors fails to meet its year 2000 requirements, then the
Company will switch to another vendor as soon as possible, but this may have a
material and adverse impact on the Company's business and financial results.
Although the Company believes that all of its important vendors will eventually
meet their year 2000 requirements, the Company cannot determine at this time
whether or when year 2000 related problems will arise with its third-party
products or whether any problems that do arise will have a material and adverse
impact on the Company's business or financial results.
The Company's overall year 2000 compliance program is on schedule, and the
Company has paid and believes that it will continue to pay the expenses of this
program using existing product development and support resources, without
incurring significant incremental development expense, and using budgeted
capital expenditures. Nevertheless, in order to complete this program, the
Company may have to add personnel and buy new third-party software, hardware and
other products earlier than planned, and personnel expenses may increase faster
than expected if year 2000 issues cause a shortage in the availability of
experienced programmers. Furthermore, year 2000 modification and testing
activities have required the deferral of lower priority development projects.
The Company does not maintain detailed accounting records that separately
identify all of the costs associated with its year 2000 activities. In response
to new disclosure requirements regarding year 2000 matters, the Company recently
reviewed its accounting and product development records for the period beginning
January 1, 1996 in an effort to estimate the costs of its year 2000 compliance
program. The Company intends to continue refining and updating these estimates
quarterly as long as this disclosure is required. On this basis, the Company
currently estimates that the total costs of its year 2000 compliance program
since January 1, 1996 will be approximately $23 million in direct labor and
benefit costs for modification and testing activities, plus approximately $12
million in capital expenditures. Through September 30, 1998, the Company has
spent approximately $12 million in direct labor and benefit costs for
modification and testing, plus approximately $2 million in capital expenditures.
The remaining estimated direct labor and benefit costs for modification and
testing activities of approximately $11 million include in part rough estimates
to cover unanticipated modification work that may arise as a result of continued
testing activity throughout 1999. The remaining estimated capital expenditures
of approximately $10 million are to replace non-compliant computer and
communications equipment, principally in the Company's DRS business .
THE FOREGOING IS A YEAR 2000 READINESS DISCLOSURE MADE PURSUANT TO THE
TERMS AND PROTECTIONS OF THE YEAR 2000 INFORMATION AND READINESS DISCLOSURE ACT.
15
<PAGE>
Part II. OTHER INFORMATION:
Item 1. Legal Proceedings: None
Item 2. Changes in Securities: None
Item 3. Defaults Upon Senior Securities: None
Item 4. Submission of Matters to a Vote of Security Holders: None
Item 5. Other Information: None
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
27.1 Financial Data Schedule for the quarter ended September
30, 1998
(b) Reports on Form 8-K: None
16
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SunGard Data Systems Inc.
Date: November 16, 1998 By: /s/ Michael J. Ruane
-----------------------------------------
Michael J. Ruane
Vice President-Finance and Chief Financial Officer
(Principal Financial Officer)
17
<PAGE>
LIST OF EXHIBITS
NUMBER EXHIBIT
- ------ -------
27.1 Financial Data Schedule for the quarter ended September 30, 1998
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED BALANCE SHEET OF SUNGARD DATA SYSTEMS INC. AS OF
SEPTEMBER 30, 1998 AND THE UNAUDITED CONSOLIDATED STATEMENT OF INCOME FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1998, BOTH INCORPORATED BY REFERENCE INTO THE
FORM 10-Q OF SUNGARD DATA SYSTEMS INC. FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 174,809
<SECURITIES> 18,622
<RECEIVABLES> 303,505
<ALLOWANCES> 34,119
<INVENTORY> 0
<CURRENT-ASSETS> 515,325
<PP&E> 377,200
<DEPRECIATION> 245,660
<TOTAL-ASSETS> 1,007,364
<CURRENT-LIABILITIES> 284,319
<BONDS> 3,002
0
0
<COMMON> 1,054
<OTHER-SE> 718,989
<TOTAL-LIABILITY-AND-EQUITY> 1,007,364
<SALES> 0
<TOTAL-REVENUES> 838,882
<CGS> 0
<TOTAL-COSTS> 507,189<F1>
<OTHER-EXPENSES> 11,847<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,058
<INCOME-PRETAX> 141,377
<INCOME-TAX> 60,672
<INCOME-CONTINUING> 80,705
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 80,705
<EPS-PRIMARY> 0.78<F3>
<EPS-DILUTED> 0.75<F3>
<FN>
<F1>EXCLUDES SELLING, MARKETING AND ADMINISTRATIVE COSTS, AND MERGER AND
RESTRUCTURING COSTS.
<F2>MERGER AND RESTRUCTURING COSTS.
<F3>INCLUDES MERGER AND RESTRUCTURING COSTS TOTALING 0.09 PER SHARE.
</FN>
</TABLE>
